Company Law Board
Om Prakash Gupta And Ors. vs Hicks Thermometers (India) Ltd. And ... on 5 April, 1999
Equivalent citations: [1999]97COMPCAS356(CLB)
ORDER
S. Balasubramanian, Chairman
1. This petition has been filed under Section 237/397/398 of the Companies Act, 1956, alleging acts of oppression and mismanagement in the affairs of M/s. Hicks Thermometers (India) Limited (the company). The respondents have raised a preliminary issue regarding the maintainability of the petition in terms of Section 399 of the Act and as such in this order we are considering this issue only.
2. The company is a listed public limited company, incorporated some time in 1961. The petitioners collectively hold 19,565 shares of the value of Rs. 1,95,650 constituting roughly about 8.72 per cent. of the subscribed and paid up capital of Rs. 22,50,000 consisting of 2,25,000 equity shares of Rs. 10 each. Section 399 stipulates that for filing a petition under Section 397/398, the petitioners should hold not less than 10 per cent. of the subscribed capital or in the alternative they should constitute one-tenth of the total members of the company. In this case, obviously the petitioners do not satisfy either of these two conditions and as such in the normal course, the petition should be dismissed as not maintainable in terms of Section 399. However, in the instant case, the petitioners have questioned the validity of issue/allotment of 50,000 equity shares made some time in 1995 and in case the issue/allotment is declared invalid, then the petitioners' holding would be more than 10 per cent. of the then subscribed capital of Rs. 17,50,000. In other words, the maintainability of the petition depends on our decision on the validity of the additional issue of 50,000 shares for Rs. 5 lakhs. We have, in a number of cases, taken the view that, when further issue of shares is impugned in a petition and that but for the further issue, the petition would be maintainable, then, before proceeding with the other allegations in the petition, the further issue would be first examined to ascertain the maintainability of the petition. In the same way, in this case also, we decided to ascertain the position.
3. Normally, in further issue of shares, we have to normally examine whether statutory provisions and the provisions in the articles for the issue have been complied with and whether the issue has been made for the benefit of the company and not for any collateral purpose like reducing the percentage shareholding of any shareholder, etc. According to the petitioners, the additional issue of Rs. 5 lakhs was made surreptitiously, illegally and in a mala fide manner for the benefit of persons who are presently in the management of the company and that the same was made on a preferential basis without offering, on rights basis, to the existing shareholders. Thus, according to the petitioners, this issue is in violation of the provisions of Section 81 of the Companies Act.
4. According to the company, the impugned shares were allotted to the managing director of the company on a preferential basis on an approval given by the shareholders in the annual general meeting in terms of Section 81(1A) of the Act. In other words, according to the company, the issue was made after following the statutory provisions. As far as the need for preferential allotment, it is the stand of the company that the company was in need of funds and as the then prevailing market price of the share was only Rs. 2.50, the company felt that there would be no response from the shareholders/public for taking the shares at par value. Since the managing director was willing to subscribe to the shares at Rs. 10 as against the market price of Rs. 2.50, and since the company needed the funds, the board decided to allot the shares to her after getting the requisite approval of the shareholders. Therefore, according to the company, the issue was made for bona fide purpose and this being the case, the percentage holding of the petitioners should be considered with reference to the increased subscribed capital of the company.
5. We have considered the pleadings and arguments of the counsel. As far as the legal requirements in regard to the preferential allotment are concerned, we find from the notice for the 32nd annual general meeting of the company convened on September 29, 1994, that a resolution in this regard has been proposed against agenda No. 7 for getting the approval of the general body under Section 81(1A) of the Act, for allotment of 50,000 equity shares of Rs. 10 each to the managing director at par with a lock-in-period of five years. In the explanatory statement it has been stated that the issue was being made to the managing director to meet the long term working capital needs of the company, as the banks have expressed their inability to provide the same. The general body have approved the proposal as is evident from the minutes of the general body meeting. Thus, we find that the legal requirements regarding the further allotment of shares have been complied with.
6. In regard to the purpose/object/motive for the allotment on a preferential basis, we perused the minutes of the board meeting held on August 18, 1994, in which the decision was taken to get the shareholders approval for this additional issue. As per the minutes of this meeting, the managing director placed before the board details regarding the requirement of funds for diversification of the company's activities in digital clinical thermometers and further informed the board that the Indian Overseas Bank had shown their unwillingness for enhancing the limit for this purpose. We directed the company to produce the necessary details in this regard. We find that, some time in late 1994, the company prepared a project for digital thermometers for which the company projected a sum of Rs. 7.42 lakhs as working capital requirements and sought Rs. 5.5 lakhs from the bank. This project was envisaged after the visit of the managing director to certain South East Asian countries to explore the possibility of exporting these thermometers. The Indian Bank, vide its letter dated August 11, 1994, expressed its inability to extend the credit facility and had advised the company to take up this matter after completion of the project. Immediately thereafter, it seems, as is evident from the board minutes, this matter was placed before the board on August 18, 1994, and the proposal to allot shares on preferential basis of 50,000 shares to the managing director at par was approved, subject to the approval of the general body. Thus, these contemporaneous records show that the further allotment of shares was a need-based one for bona fide purpose and for the benefit of the company.
7. Thus, we find that there is no scope for us to declare the allotment as invalid. Thus, the subscribed share capital on the date of filing of the petition was Rs. 22,50,000. If it is so, the petitioners should be holding shares worth at least Rs. 2,25,000 on that day to maintain the petition in terms of Section 399. However, they held shares of the face value of only Rs. 1,95,650, i.e., less than 10 per cent. of the subscribed capital, and therefore, do not meet the requirements of Section 399 and as such the petition deserves to be dismissed as not maintainable. However, we find that the petition is a composite petition wherein the petitioners have also invoked the provisions of Section 237 of the Act seeking investigation into the affairs of the company. Since the foundation of the petition is under Section 397/398 and as the requirements of Section 399 are not fulfilled, we dismiss this petition with liberty to the petitioners to file a separate petition under Section 237 if they so desire. No order as to costs.