Karnataka High Court
I.T. Cube India (P.) Ltd. vs I.T. Cube Inc. on 13 March, 2006
Author: N. Kumar
Bench: P. Vishwanatha Shetty, N. Kumar
JUDGMENT N. Kumar, J.
1. The appellant has preferred this appeal challenging the order dated 28-1-2004 passed by the Company Law Board, Principal Bench, New Delhi, in Company Petition No. 47/2003 filed under Sections 397, 402, 403 and 406 of the Companies Act (hereinafter referred to as 'the Act') by which the Company Law Board (for short hereinafter referred to as 'Board') has held that the allotment of 7, 100 shares each in favour of the respondent Nos. 2, 3, 4 and 5 amounting to 28,400 shares issued on 16-1-2003 is illegal and void in terms of Article 9 of Articles of Association of the company and consequently setting aside the same as being wrongful, illegal and void ab initio.
2. The facts leading to this appeal are as hereunder:
The appellant No. 1 is a company incorporated under the provisions of Companies Act, 1956 on 5-7-2000 as a private limited company having the authorised share capital of Rs. 10,00,000 divided into 1,00,000 shares of Rs. 10 each. Out of the same 8,900 shares of Rs. 10 each were issued and subscribed on incorporation of the company. The main object of the company is to carry on the business of manufacturing, developing and distribution of software. The appellant No. 2 herein and respondent Nos. 2, 3 and 5 before the Company Law Board who are not made parties to this appeal were the original promoters of the company. They are the subscribers to the Memorandum and Articles of Association of the company. They are also the first directors of the company. Out of the total subscribed shares of 8,900 each of the aforesaid promoters were holding one share each, ie., in all four shares. The first appellant-company was allotted 8,896 shares, thus, the company held 99.95 per cent shares in the company. In fact, the first respondent-company had deposited in advance with the first appellant-company a sum of Rs. 1,60,885 by way of share capital for issue of further shares which is also acknowledged by the company in its balance sheet for the year ending 31-3-2002.
3. The Board of Directors of the first appellant-company allotted further shares to each of them to the extent of 7,100 shares and in all 28,400 shares by Board resolution dated 16-1-2003, It was also accordingly informed to the Registrar of Companies by filing appropriate application in Form No. 2. All this was done without notice to the respondents and behind their back. The effect of such allotment was that the first appellant-company which had 99.95 per cent holding in the company and thus a majority shareholders, became a minority shareholders with their holding reduced to 23.85 per cent. On coming to know of this act on the part of the Board of Directors, the first respondent-company filed a petition under Sections 397, 402, 403 and 406 of the Act before the Board for the relief of restraining the Board of Directors from holding themselves as the directors of the company; framing of a Scheme for the management, administration, control and affairs of the company; an investigation to be made with regard to the dealings and transactions of the Board of Directors in relation to the management and affairs of the company; a perpetual injunction restraining the Board of Directors from interfering and intermeddling with the management and affairs of the company; a declaration that further issue of share of the company purportedly issued on 16-1-2003 as wrongful, illegal and ab initio void and for a further declaration that any action taken by the Board of Directors in respect of further issue of shares of the company after 13-7-2000 is null and ab initio void and not binding upon the shareholders of the company.
4. After service of notice, the appellants herein appeared, filed a detailed statement of objections and contested the matter. The appellants contended that the first appellant is a private limited company. It is not under an obligation to follow the procedure prescribed under Section 81(1) and (2) of the Act while allotting additional shares of the company and, therefore, they committed no illegality in not issuing a notice and giving an opportunity to the majority shareholders to purchase shares. Secondly, it was contended that in view of Section 9 of the Act which has an overriding effect to the provisions in the Articles of Association to the extent it is repugnant to Section 81(1) and (2) is void and unenforceable. Lastly, it was contended that even if Article 9 is read in its entirety the ratification of the general body meeting is required only in case if the company decides to allot or otherwise dispose of the shares at discount or at premium or at par, and it does not apply to a case of allotment of additional shares and any other cases. Therefore, they contended that the allotment of additional shares is legal and valid and there is no substance in the claim put forth by the first respondent.
5. The Company Law Board on going through the pleadings of the parties, the documents relied on by them as well as the arguments addressed by the learned counsel appearing for the parties, held, that the company was bound to hold general meeting of shareholders before issue of further shares. Accordingly, the appellants should have given notice of issuance of further shares of the company; the appellants cannot be allowed to lake advantage of their own wrongs by not calling the general meeting of the shareholders at the time of initial allotment of shares, and moreover, during the period of first allotment of shares there were only four shareholders and they were all directors of the respondent-company. Therefore, it proceeded to hold that the entire allotment of shares is contrary to the terms of Article 9 of the Articles of Association and, therefore, the allotment of further issue of shares of 28,400 was set aside being wrongful, illegal and void ab initio. Further it did not go into other prayers made by the first respondent and held that the same can be decided in the general meeting of the shareholders. Aggrieved by the aforesaid order of the Company Law Board the appellants arc before this Court.
6. Sri Satish, learned counsel appearing for the appellants, contended that under the Act there is no obligation cast upon the appellant to follow the procedure prescribed under Section 81(1) and (2) in the matter of allotment of additional shares. As Article 9 of the Articles of Association is repugnant to Section 81(3) of the Act which explicitly makes it clear that there is no such obligation. The Board committed serious error in relying on Article 9 to grant the relief to the first respondent. He further submitted that as per Article 9 it is only when shares are allotted at discount they have to place it before general meeting for its ratification and the same is not attracted in case of allotment of additional shares. Therefore, he submitted that the impugned order passed by the Board is illegal and it is liable to be set aside.
7. Per contra, Sri. Mehta, learned counsel appearing for the respondents, supported the impugned order and in particular he submitted that Article 9 has been violated by the appellants in the matter of allotting additional shares and the Board was justified in setting aside such allotment which is illegal and void ab initio.
8. In view of the aforesaid facts and rival contentions, the questions that arise for consideration are:
(1) What is the procedure prescribed in law for issue of further capital in respect of a private company ?
(2) Whether in the instant case the Board committed any illegality while passing the impugned order ?
9. In order to answer the aforesaid question it is necessary to look into Section 81 of the Act which deals with further issue of capital which reads as under:
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, whichever is earlier, it 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 holder 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 exercisable 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 to the company.
Explanation.--In this Sub-section, 'equity share capital' and 'equity shares' have the same meaning as in Section 85, (1A) Notwithstanding anything contained in Sub-section (1), the further shares aforesaid may be offered to any person whether or not those persons include the persons referred to in Clause (a) of Sub-section (1) in any manner whatsoever--
(a) if a special resolution to that effect is passed by the company in general meeting, or
(b) where no such special resolution is passed, if the votes cast (whether on a show of hands, or on a poll, as the case may be) in favour of the proposal contained in the resolution moved in that general meeting (including the casting vote, if any, of the chairman) by members who, being entitled so to do, vote in person, or where proxies are allowed, by proxy, exceed the votes, if any, cast against the proposal by members so entitled and voting and the Central Government is satisfied, on an application made by the Board of Directors in this behalf, that the proposal is most beneficial to the company, (2) Nothing in Clause (c) of Sub-section (1) shall be deemed--
(a) to extend the time within which the offer should be accepted, or
(b) to authorise any person to exercise the right of renunciation for a second time, on the ground that the person in whose favour the renunciation was first made, has declined to take the shares comprised in the renunciation.
(3) Nothing in this section shall apply--
(a) to a private company; or
(b) to the increase of the subscribed capital of a public company caused by the exercise of an option attached to debentures issued or loans raised by the company--
(i) to convert such debentures or loans into shares in the company, or
(ii) to subscribe for shares in the company:
Provided that the terms of issue of such debentures or the terms of such loans include a term providing for such option and such term--
(a) either has been approved by the Central Government before the issue of debentures or the raising of the loans, or is in conformity with the rules, if any, made by the Government in this behalf; and
(b) in the case of debentures or loans other than debentures issued to, or loans obtained from, the Government or any institution specified by the Central Government in this behalf, has also been approved by a special resolution passed by the company in general meeting before the issue of the debentures or the raising of the loans.
10. Section 81(1) and (2) provides that 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 whichever is earlier, it is proposed to increase the subscribed capital of the company by allotment of further shares, then, 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. Further it provides the procedure to be followed starting from issue of notice till allotment is made.
11. However, Sub-section (3) of Section 81 provides that nothing contained in the aforesaid section shall apply to a private company or to the increase of the subscribed capital of a public company caused by the exercise of an option attached to debentures issued or loans raised by the company. In other words, insofar as further issue of capital is concerned, a private company is not under an obligation to follow the procedure prescribed under Section 81(1) and (2) of the Act. That does not mean the Board of Directors of the company could adopt any procedure they like. In the absence of any specific statutory power, they are governed by Sections 291, 292 of the Act and the memorandum and articles of association.
12. Section 291 of the Act deals with general powers of the Board. It provides, subject to the provisions of this Act, the Board of directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to exercise and do. Proviso to the said section provides that the Board shall not exercise any power or do any act or thing which is directed or required, whether by this or any other Act or by the memorandum or articles of the company or otherwise, to be exercised or done by the company in general meeting. Therefore, if the Act or the articles or memorandum of association provides that a particular act shall be done by the company, in general meeting, it shall be done only in the manner stipulated therein. Section 292(2) of the Act deals with powers to be exercised by the Board only at meeting. That provision vests with the Board the power to do acts by means of resolution passed at meetings of the Board in respect of matters stipulated therein. A reading of the aforesaid provision shows that power to issue additional shares is not one such power which is conferred on the Board of Directors. It is in this back ground we have to look at Article 9 of the Articles of Association which provides as hereunder:
Variation of Capital.--Subject to the provisions of the Act and these Articles, the shares in the capital of the Company for the time being (including any shares forming part of any increased capital of the company) shall be under the control of the Directors who may issue, allot or otherwise dispose of the same or any of them to such persons, in such proportion and on such terms and conditions and either at premium or at par or (subject to compliance with the provisions of the Section 79 and Section 79A of the Act) at a discount and at such times as they may from time to time think fit and proper, with full power subject to the sanction of the company in general meeting.
13. The aforesaid provision makes it clear that the shares in the capital of the company shall be under the control of the Directors who may issue, allot or otherwise dispose of the same or any of them to such persons in such proportion and on such terms and conditions and cither at premium or at par or at a discount and at such times as they may from time to time think fit and proper with full power subject to the sanction of the company in general meeting. Therefore, though the power to allot shares has been conferred on the Board of Directors under Article 9, such power is subject to sanction of the company in general meeting irrespective of the fact whether it is allotted at premium or at par or at discount. This provision is in conformity with Sections 291 and 292 of the Companies Act.
14. It is to be remembered that all the powers of the management of the affairs of the company are vested in the Board of Directors. The Board thus becomes the working of the company. In their domain of power there can be no interference, not even by the shareholders. The manner in which the directors are to exercise their powers depends on the company s articles. The Act provides that in respect of the matters listed in Section 292, the Directors must sit together at a Board meeting, the company is entitled to their collective wisdom. The Act goes further and specifies in Section 293 a number of powers which the directors must exercise only with the consent of shareholders in general meeting. The Act thus makes managerial powers exercisable in three ways : (1) Powers which can be put to use in accordance with the Articles; (2) a set of powers which can be exercised only at a board meeting and (3) another set of powers exercisable with the consent of shareholders in general meeting. In the case of a matter which is not positively listed in one way or other it will depend upon whether it pertains to management or for residual matter which ought to go before the ultimate controller of the company's testimony, namely, the general body of shareholders. Therefore it is clear, when the Section 81(1) and (2) of the Act which specifically provides the manner in which further issue of capital is to be issued and the procedure for such further issue the entire procedure of further issue of capital is governed by the said statutory provision and the company is bound to follow the said procedure. When the very section says the procedure prescribed therein is not applicable to a private company, the company is under no obligation to follow the said procedure in the matter of issue of further capital. Section 292 does not provide the manner in which the further capital in respect of a private company is to be issued. Therefore, the Board of Directors have no such power to issue further capital of a private limited company. What remains is Section 291, the general power of the Board, It mandates that the company shall be entitled to exercise all such powers as the company is authorized to exercise. The said authorization must be under the statute or by the memorandum or articles of association of the company or otherwise. As referred to earlier, there is no statutory provision prescribing the mode in which the further share capital of a private company is to be issued. However, Article 9 of the articles of association provides for issue of further share capital. It mandates that such further issue of share capital could be done by the company subject to sanction of the company in general meeting. That is the procedure prescribed which the Board of Directors are bound to follow. There is no inconsistency in the aforesaid article and Section 81 of the Act as contended by the learned counsel for the appellant. A harmonious interpretation of the various Sections of the Act referred to supra and the aforesaid Article 9 of the articles of association makes it abundantly clear that the Board of Directors are governed by Article 9 in the matter of issue of further shares of the petitioner-company. It is in this background we are unable to read any inconsistency in the aforesaid article vis-a-vis Section 81(1) and (2) of the Act as sought to be made by the learned counsel for the appellants.
15. In fact, learned counsel of the appellants also relied on a judgment of the Bombay High Court in the case of Cricket Club of India Ltd. v. Madhav L. Apate [1975] 45 Comp. Cas. 574 wherein it was held that any provision contained in memorandum, articles, agreement or resolution of a company which is repugnant to any provision of the Act, whether such provision be expressly found in any section or is to be read in the said section by necessary implication, would be clearly void. There is no dispute insofar as the aforesaid legal proposition. As noticed by us earlier, since there is no inconsistency between the aforesaid Article 9 of the Articles of Association and Section 81(1) and (2) of the Act, the judgment relied on by the learned counsel for the appellants has no application to the facts of this case. Moreover, Article 9 is in conformity with Sections 291 and 292 of the Act.
16. In view of the aforesaid discussion, the Board was under an obligation to follow the procedure prescribed in Article 9 of the articles of association in the matter of further issue of shares in respect of the company. Admittedly, as the said procedure is not followed and the procedure followed is contrary to Article 9 of the articles of association the issue of additional shares by the company is void ab initio and the Company Law Board was fully justified in setting aside the said allotment. In that view of the matter, we do not find any infirmity in the finding recorded by the Board which calls for interference. Accordingly, the appeal is liable to be dismissed.
In terms stated above, the appeal is dismissed. However, no order is made as to costs.