Company Law Board
Shri Som Prakash Singhania And Ms. Manju ... vs Nahorjan Tea Company Private Ltd. And ... on 4 July, 2006
Equivalent citations: [2006]134COMPCAS231(CLB), (2007)2COMPLJ531(CLB)
ORDER
S. Balasubramanian, Chairman
1. This petition has been filed under Section 111(4) of the Companies Act, 1956, seeking for rectification of the Register of Members of M/s Nahorjan Tea Company Private Ltd (the company) by deleting the names of the 2nd and 4th respondents in respect of 51 and 55 equity shares respectively on the grounds stated in the petition.
2. The facts of the case are: The first petitioner and the respondent 2 to 5 are brothers. They are all directors of the company. In 1977, the authorised capital of the company was increased from 2000 shares of Rs. 100 each to 6000 shares of Rs. 100 each. This increase was challenged and the matter went upto Supreme Court which, in 1998, upheld the increase. The fully paid 2000 shares were held by 17 shareholders. The 1st petitioner, held 163 equity shares and his wife, the 2nd petitioner, held 100 shares. With a view to raise funds for the company, in a Board meeting held on 9.2.2002, the Board decided to issue 4000 equity shares at par to the existing shareholders in the ratio of 2 equity shares for 1 equity share held by the members. In terms of the letter of offer, the shareholders could apply for additional shares over and above their entitlement, so that unsubscribed right shares could be allotted proportionately to those who had applied for additional shares. While the petitioners applied for 1600 and 1000 additional shares respectively, the 2nd and 4th respondents applied for 25,720 and 25520 additional shares respectively. Three shareholders collectively entitled to 300 shares did not apply for the right shares and therefore, these 300 shares were available for allotment to those who had applied for additional shares. While the number of unsubscribed right shares was 300, the number of additional shares applied was 57, 320. In a board meeting held on 16.03.2002, the board allotted the unsubscribed additional shares in the ratio of 1:191. The petitioners have questioned this allotment on the ground that the additional shares applied for by the respondents could not be more than the total number of the right shares offered and by applying the ratio on that basis they have got themselves allotted more shares, which is oppressive to the petitioners.
3. Shri Mukherjee, Senior Advocate, appearing for the petitioners, submitted: The proposal for the rights issue and the disposal of the unsubscribed shares are governed by Article 7 of the AOA of the company. While this article was complied with for the increasing the capital and the issue of letters of offer, yet, the 2nd and 4th respondents did not comply with the terms of offer. The offer letter dated 15.02.2002 clearly indicated that the offer was for 4000 equity shares and in paragraph 7.6 of the letter of offer, it was also specified that the unsubscribed shares would be allotted amongst willing shore holders in proportion to the number of additional shares applied for by them. When the number of shares offered was only 4000, no one can apply for more than that as additional shares. But the 2nd and 4th respondents applied for more than 25000 shares as additional shares only with the view to get more shares. In a public issue, more shares can be applied for but not in a right issue as the recipient is identified and the total number of shares offered is known. In the board meeting on 16.03.2002, the 1st petitioner protested that the additional shares applied for beyond 4000 should not be taken into account in allotting the unsubscribed shares, but by majority, the respondents allotted the shares in the proportion of 1:191. By adopting this ratio, the 2nd and 4th respondents have been allotted 135 and 134 additional shares respectively. If the allotment had been made on the basis that these respondents could have applied only to a maximum of 4000 shares each, being the total number of shares offered, they would have been entitled only to 84 and 79 shares respectively, as the proportion would have been 1:44.4. By this wrongful allotment, the existing shareholding pattern had been changed and the petitioners have been reduced to below 10% and the petitioners have been denied of their rightful entitlement at the ratio of 1:44 and as such the register of members should be rectified as prayed for.
4. The learned Counsel relied on the following cases:
1. Basudeb Kataruka v. Dhanbad Automobiles Pvt Ltd 47 CC 68 Pat: A petition under Section 111(4) of the Act against the allotment of shares is permissible. Since the parties who are to be affected by the grant of reliefs sought for have been made parties, there is no need to implead all the parties to whom shares were allotted.
2. Cetus Electronics P. Ltd v. Dr. Jitendra Nath Saha 82 CC 688 CLB: Discretion vested in the Directors in the allotment of shares is not unfettered. Allotment can be cancelled on principle of equity and fairness.
3. Bajaj Auto Ltd v. N.K. Firodia : Absolute discretion does not mean a mere affirmation or negation of a proposal. Discretion implies just and proper consideration of the proposal on the facts and circumstances of the case. The directors being in fiduciary position should not take advantage of their position.
4. Piercy v. Mills & Co 1918-19 AER ChD 313: Directors cannot issue shares with the view to maintain their control over the affairs of the company.
5. Harinagar Sugar Mills Ltd v. Shyam Sundar Jhunjunwala 31 CC 387: Directors cannot act oppressively, capriciously or corruptly.
5. The learned Counsel for the respondents submitted: The petition suffers from non-joinder of all the shareholders. In all, 13 members applied for additional shares and 9 were allotted. If the petitioners challenge the allotment, then, all the 9 allottees would have to be made parties. Neither the articles, nor the statute prescribe that additional shares applied for cannot exceed the total number of shares offered. Nothing prevented the petitioners from applying for more additional shares. Perhaps, they did not do so as consideration for the additional shares had to be remitted along with the application. The petitioners also got additional shares in proportion to what they had applied. After the allotment was made, meetings have been held and the members have exercised voting on the shares allotted. It is not in dispute that the company needed funds. Article 7 (a) clearly specifies that shares shall be under the control of the directors who may allot shares at their discretion. In the Board meeting when shares were allotted, the petitioner was present and the Board unanimously passed the resolution regarding the allotment. Further, when the company refunded the excess amount remitted by the petitioners along with the applications, the encashed the cheques without protest, which would indicate that they had acquiesced to the allotments made. Their inaction for over 9 months in filing the present petition would also signify the same. The directors had not acted in breach of the terms of the notice of offer. As indicated therein, additional shares were allotted proportionately and therefore the entire allotment was transparent. While it is conceded that CLB can look into allotment of shares in a petition under Section 111 (4), but in the present case, there is nothing oppressive or illegal.
6. In rejoinder, Shri Mukherjee submitted: Other allottees won't be affected in any manner if rectification is ordered and as such they need not be made parties. In the Board meeting, it was decided to seek legal opinion, but the respondents had recorded that the allotment was by a unanimous decision as the minutes were recorded by them. The petitioners did not have access to the minutes. They were never given a copy of the minutes. However, as soon as the petitioners got intimation about the allotment, the 1st petitioner wrote to the company on 27.3.2002, pointing out about the decision to take legal opinion. The petitioner also informed the respondents that as per the legal advice obtained by him, no shareholder could apply for more shares than the total number of shares offered on right basis. By a letter dated 6.4.2002, the petitioners again wrote to the directors to cancel the allotment made in the ratio of 1:191 and allot shares in the ratio of 1:44.4. In reply, the 4th respondent, by a letter dated 6.4.2002, informed the petitioner that after noting the suggestion of the petitioner, by majority decided to allot shares as had been done and that there was no proposal to obtain legal opinion.
7. I have considered the pleadings and arguments of the counsel. The respondents have questioned the maintainability of the petition on the ground of non joinder of all the allottees. It is an admitted fact, that the petitioners are challenging the allotments made only to the 2nd and the 4th respondents, who are parties to this petition. Since allotment to no other shareholder has been impugned, it is not necessary to implead them as parties as held in Dhanbad Automobiles case(supra). In regard to the delay alleged on the part of the petitioners in moving the instant petition and the fact that the shareholders have exercised voting rights on the basis of the allotments made are concerned, it is on record that even after the allotment, the petitioner had been questioning the same and he has filed this petition without much of loss of time. Therefore, this petition does not suffer from delay or laches.
8. It is a settled law, as has been held in the cases cited by the learned Counsel for the petitioners, that even if the directors have absolute discretion in the allotment of shares, the discretion should be exercised bona fide. No doubt that no statute or Articles prohibit applying for additional shares over and above the total number of shares offered, but considering the fact that the company is a closely held private company and the offer is on right basis, common sense ' should prevail. When the total number of shares offered was 4000 shares, and if one applies for his entitlement of right shares of say 100 shares, then he can apply only for the balance of 3900 shares, assuming that other shareholders would not apply even for their right entitlement. It is highly unrealistic to apply for more than 6 times of the total shares offered, which would also involve over Rs 25 lakhs as application money. Even if the 2nd and 4th respondents had bonafidly applied for additional shares beyond 4000 shares, yet, when the petitioner had brought to the notice of the Board in the meeting held on 16.3,2002 that additional shares applied beyond 4000 shares should be ignored, these respondents should have considered the matter afresh instead of going ahead with the allotment, especially when it is their own applications that were under consideration. It is on record that these two respondents, constituting majority on the Board, had decided to allot shares taking into consideration their own applications, ignoring the objections of the petitioner. This would indicate that these two respondents had exercised their discretion to their own benefits. Therefore, the allotments in the ratio of 1:191 deserves to be cancelled on equity and fairness as held in Cetus Electronics P Ltd. (supra). However, instead of doing so, I direct as follows: The 2nd and 4th respondents were entitled to 280 and 480 right shares respectively. Therefore, their application for additional shares should be restricted to 3720 and 3520 shares respectively. On this basis taking into account the additional shares applied for by other shareholders, the ratio of allotment of 300 shares will be decided by the Board within 21 days of this order. Thereafter, the excess shares now stand allotted to these respondents will be offered to other applicants according to their entitlement on the basis of the new ratio, within 10 days asking them to remit the consideration at par within 10 days thereafter. On receipt of the consideration, the 2nd and 4th respondents will transfer the shares now standing in their names to the applicants. In case, any of the shareholder does not apply within the said period the offer will lapse and the respondents will be at liberty to retain the unsubscribed shares.
9. The petition is disposed of in the above terms without any order as to costs.