HASMUKHLAL MADHAVLAL PATEL AND ANR. versus AMBIKA FOOD PRODUCTS PVT. LTD. AND ORS. on 15 June 2023

HASMUKHLAL MADHAVLAL PATEL AND ANR.

v.

AMBIKA FOOD PRODUCTS PVT. LTD. AND ORS.

(Civil Appeal No. 8194 of 2018)

JUNE 15, 2023

[K. M. JOSEPH AND B. V. NAGARATHNA, JJ.]

Companies Act, 1956 – s. 2(32), 81, 81(1A), 81(3), 397, 398– Companies Act, 1913 – s. 105-C – First respondent is a privatelimited company having authorised capital of Rs.1 crore – Thereare three groups i.e. HMP, S and VPP – Appellant nos. 1 and 2described as the ‘HMP’ Group had 30.80% of the paid up sharecapital – ‘S’ Group represented by respondent nos. 4 & 5 had 45per cent share and ‘VPP’ Group represented by respondent nos. 2& 3 had 24.20 percentage in the paid-up capital – In response tothe proposal for a term-loan made by the appellants, Bank advisedthem to increase Share Capital for minimum level of Rs. 2 Crore –First respondent company send a Notice to its Directors, four innumber, viz., the appellants and Respondents 2 & 3 – Meeting wasconvened on 18.12.2009 – Directors of ‘S’ group resigned earlierand directors of ‘VPP’ Group were granted leave of absence – Inthe said meeting, the company proposed to issue further shares toits existing members in the ratio of 1:1 – S and VPP group sought totreat the first respondent company as disputed company – Thereafter,in minutes of Extraordinary General meeting of shareholders(27.01.2010), the authorised share capital of the company wasincreased to 2 crores – VPP Group and the S Group, purported toproject a case of mismanagement and oppression by the appellantsin the petitions u/s. 397 and 398 of the Companies Act, 1956 –NCLT found that the increase in the share capital and the allotmentof shares itself, was not an act of oppression of the rights – NCLATfound that the allotment in the ratio of 1:1 was not oppressive –However, the manner in which allotment is done, may be illegaland, thus, oppressive – The act of increase in the share capital wasupheld – The distribution of shares was ‘defective’ – On appeal,held: The authorised capital of a company, which is also known asnominal capital of the company, represents the maximum number ofshares that can be issued – It must be indicated in the Memorandum

A

B

CDEF

GH

Aof Association – It can be increased only by the company by passinga resolution in a General Body Meeting – By the Resolution dated18.12.2009, the Board of Directors had not actually purported toincrease the Authorised Capital – The contents of the last paragraphof the Resolution, makes it abundantly clear that the Board ofDirectors was aware that the power lay with the General Body ofBshareholders to bring about an increase in the authorised capital –It has, no doubt, undertaken to resolve to issue further capital,even though it could be said that as on 18.12.2009, there was ‘nofurther capital’ subsisting in terms of the limit of Rs. 1 crore, whichconstituted the Authorised Capital as on 18.12.2009 – What is moreCshares have been offered on a ratio of 1:1 to the existingshareholders – They were given the choice of refusal or to applyfor more or lesser number of shares – This is not a case where theResolution was to allot the further shares to the Directors orMembers of their Group alone – There is a concurrent finding thatthe decision to go in for increase in capital, viz., Authorised Capital,Dwas not vulnerable to attack – The decision was based on the advicegiven by the Bank – The purpose of the Board of Directors toincrease the capital has been admittedly found to be bona fide – Anincidental gain, namely the change in the shareholding pattern isentirely the inevitable result of the refusal of the respondent’s groupsEto apply – On the whole, in the facts, the appellants cannot bedescribed as having acted in a defective or in an unfair manner, inthe matter of allotment of further shares particularly when thecontention of the respondents about the bona fides of the decisionto increase the authorised capital has been found in favour of theappellants.F

Partly allowing the appeals, the Court

Conclusion

Partly allowing the appeals, the Court

HELD: 1.1 The Authorised Capital of a company, which isalso known as nominal capital of the company, represents themaximum number of shares that can be issued. It must beGindicated in the Memorandum of Association. It can be increasedonly by the company by passing a resolution in a General BodyMeeting. In other words, the Authorised Capital cannot beincreased by the Board of Directors. It is out of the AuthorisedCapital that a company issues shares. It then becomes the IssuedCapital. Whatever is issued, need not be subscribed to. WhateverH

is subscribed to, would become the Subscribed Capital. Paid-upCapital is defined in Section 2(32) of the Companies Act, 1956 asincluding capital credited as paid-up. The Subscribed Capital maybe wholly or partly paid-up. [Paras 67, 68][279-D-G]

1.2 The position under the Companies Act, 1956, underSection 81, remained the same in that it is only the company, inits General Body Meeting, which could increase the AuthorisedCapital. The position still continued that call it increase inSubscribed Capital, it must be within the limits of the AuthorisedCapital. By the Resolution dated 18.12.2009, the Board ofDirectors had not actually purported to increase the AuthorisedCapital. The contents of the last paragraph of the Resolution,makes it abundantly clear that the Board of Directors was awarethat the power lay with the General Body of shareholders to bringabout an increase in the Authorised Capital. It has, no doubt,undertaken to resolve to issue further capital, even though itcould be said that as on 18.12.2009, there was ‘no further capital’subsisting in terms of the limit of Rs.1 crore, which constitutedthe Authorised Capital as on 18.12.2009. The Resolution to allotthe shares in 1:1 ratio and the indication that shares, which arenot applied for, could be the subject matter of allotment to othershareholders, were all to become operative upon the applicationsbeing considered. The Minutes further reveal that theconsideration of the application was to await the increase in theAuthorised Capital in a duly constituted meeting of the GeneralBody of shareholders. It is, no doubt, true that the proper way ofdoing it could have been to pass a Resolution after theshareholders resolved to increase the Authorised Capital. It isequally true that such a Resolution was passed on 27.01.2010.The question is, as to whether the act of the Board of Directorsattracted the opprobrium of it being an act of oppression. Wewould think that the decisions of the Board of Directors on18.12.2009, understood as a whole, only means that theResolution to issue further capital was to become effective onlyafter the Authorised Capital was duly increased. This is not acase where the Board of Directors had resolved to allot the sharesotherwise disregarding the mandate of Section 81 of the Act. Whatis more shares have been offered on a ratio of 1:1 to the existing A

BC

D

E

F

G

H

Ashareholders. They were given the choice of refusal or to applyfor more or lesser number of shares. This is not a case where theResolution was to allot the further shares to the Directors orMembers of their Group alone. There is a concurrent findingthat the decision to go in for increase in capital, viz., AuthorisedCapital, was not vulnerable to attack. The decision was based onBthe advice given by the Bank. The purpose of the Board ofDirectors to increase the capital has been admittedly found to bebona fide. An incidental gain, namely the change in theshareholding pattern is entirely the inevitable result of the refusalof the respondent’s groups to apply. This Court cannot proceedCon the basis that the appellants foresaw and deliberately plannedthe whole affair. If only the respondents had applied, the situationwould not have happened. [Paras 71, 72][280-E-H; 281-A-E]

1.3 As far as the aspect that, the purported object was shownas generating fresh funds but in place of Rs.90 lakhs only Rs.21Dlakhs was brought in goes, the fact that the paid-up capital wasapparently shown as credited by cancelling loans due by thecompany to the appellants group, should not prevent this Courtfrom overlooking the fact that the debt-equity ratio hasundoubtedly been improved. It must be borne in mind that thewhole idea was to get funds from the Bank for the expansion ofEthe company. The case of the respondents that there were loansdue to them also may not advance their case. It would have beendifferent if the respondents had applied and sought adjustmentof the consideration by cancelling loans given by them to thecompany and it was rejected. On the whole, in the facts, theFappellants cannot be described as having acted in a defective orin an unfair manner, in the matter of allotment of further sharesparticularly when the contention of the respondents about thebona fides of the decision to increase the authorised capital hasbeen found in favour of the appellants. The appeals are partlyallowed. The direction to allot shares in the impugned order isGset aside. The order for conducting audit will remain undisturbed.There will be no order as to costs. [Para 73][281-F-H; 282-A]

Nanalal Zaver and another v. Bombay Life AssuranceCompany Limited and another AIR 1950 SC 172 :[1950] SCR 391 – followed.H

Dale & Carrington Invt. (P) Ltd. And another v. P.K.Prathapan and others (2005) 1 SCC 212 : [2004] 4Suppl. SCR 334 – distinguished.

A

Needle Industries (India) Ltd. and others v. NeedleIndustries Newey (India) Holding Ltd. And others (1981)3 SCC 333 : [1981] 3 SCR 698 – referred to B

Case Law Reference

C

CIVIL APPELLATE JURISDICTION : Civil Appeal No.8194of 2018.

From the Judgment and Order dated 02.04.2018 of the NationalCompany Law Appellate Tribunal, New Delhi in Company Appeal (AT)No.273 of 2017.

D

With

Civil Appeal No.8195 of 2018.

Ms. Meenakshi Arora, Sr. Adv., Mohit D. Ram, Ms. MonishaEHanda, Rajul Shrivastav, Anubhav Sharma, Advs. for the Appellants.

Ritin Rai, Sr. Adv., S. S. Shroff, Malak Manish Bhatt, Siddharth,Advs. for the Respondents.

The Judgment of the Court was delivered by F

K. M. JOSEPH, J.

1. The first respondent is a private limited company. It can also bedescribed as a closely held private limited company. The authorisedcapital of the first respondent was Rs.1 crore. It consisted of ten lakhequity shares of Rs.10/- each. The paid-up capital was also the same.There are three groups. Appellants 1 and 2, together and relatives canbe described as the H.M. Patel Group. They had 30.80 percentage ofthe paid-up share capital. The next Group to be noticed is the ShethGroupwhich is represented by Respondents 4 and 5, viz., Kirti KumarOchachhavlal Sheth and Ashwinikumar Kirtikumar Ochachhavlal Sheth(hereinafter referred to as, ‘the Sheth Group’, for short). The Sheth G

H

AGroup had 45 per cent share in the paid-up capital. The third Group isrepresented by Respondents 2 and 3, viz., Manish Vipinchandra Pateland Krunal Vipinchandra Patel. They had 24.20 percentage of the paid-up share capital. They are referred to hereinafter as the ‘V.P. PatelGroup’.

B2. The V.P. Patel Group filed T.P. 197 of 2016 (C.A. 16 of 2012)whereas the Sheth Group filed T.P. 10 of 2016 (C.P. 86 of 2010). Thefirst respondent is the company. Respondents 2 and 3, in both the petitions,are the appellants before us. The V.P. Patel Group and the Sheth Group,through the aforesaid Petitions, purported to project a case ofmismanagement and oppression by the appellants in the Petitions styledCunder Sections 397 and 398 of the Companies Act, 1956 (hereinafterreferred to as ‘the Act’, for short). By Order dated 17.05.2017, theNCLT, Ahmedabad Bench disposed of the petitions with the followingdirections:

“92. In this set of facts, it is not just and equitable to order windingDup of the company. If the company Is to be wound up it is not inthe interest of the company or and it is not in the interest of thethree groups of shareholders. Therefore, this Tribunal is of theview that it is just and expedient to give following directions/ ordersin this matter: - E(a) In view of the findings on point No. 3 it is held that increase inthe authorised share capital of company from rupees one crore totwo crores is valid and binding on all the shareholders. However,the allotment of shares in respect of increased share capital shallbe made to all the existing shareholders of the Company as onF18.12.2009 in proportion to their shareholding. In case if anyshareholder is not willing to subscribe for additional shares, thenthose shares shall be allotted to other shareholders taking theiroptions again proportionate to their shareholding.

(b) In view of findings on point No. 4, the removal of respondentsG2 and 3 as directors of the company is not valid.

(c) In view of finding on point No. S, this Tribunal direct that thereshall be audit of accounts of the company from the financial year2009-20l0 and determine what are the amounts siphoned by eachpetitioners and respondents 2to 5 and place the report before theGeneral Body of the company duly convening Extra OrdinaryH

General Meeting. The company is directed to take steps forrecovery of such amounts from the concerned persons.

(d) Mis. A.R. Sulakhe& Co., 515, Loha Bhavan, Opp. Old HighCourt, Near Income Tax Circle, Ashram Road, Ahmedabad 380009is appointed as auditors for the purpose auditing accounts of thecompany as directed above. The Auditors shall file report beforethis Tribunal within two months from the date of this order serving copy to the company and its directors. Fee of the auditorsistentatively fixed at Rs. 50,000/- (Rupees fifty thou sand only).The auditors are at liberty to ask for further remunerationdepending on work load.

(e) This Tribunal direct the Independent Valuer to determine thefair value of the shares of the first respondent company as on thedate of filing (CP 85/2010) TP 10/2016.

(f) A.S. Gupta & Co., 203/1 New Cloth Market, 1st Floor, OutsideRaiput Gate, Ahmedabad 380 002 is appointed as independentvaluer to assess the fair value of the shares of the first respondentcompany as on the date of filing of this petition taking intoconsideration report of the auditors also. Independent valuer shallfile his report fixing fair market value of the shares of the firstrespondent company before this Tribunal. Valuer shall take up thework of assessing valuation of the shares of the company afterreport of the auditor is filed. Independent valuer shall file reportbefore this Tribunal within two months from the date of filingauditor’s report. Any one of the shareholders is at liberty to file anapplication before this Tribunal seeking directions/orders regardingthe manner and mode in which the shares of company shall besold and who has to purchase and at what value the shares are tobe sold.

(g) Fee of the independent valuer is tentatively fixed at Rs.50,000/- (Rupees fifty thousand only). The independent valuer is at libertyto ask for further remuneration depending upon the work load.

(h) Pending completion of the entire process as per this orderthere shall not be any alienation of properties both movable andimmovable of the respondent no. 1 company by any of the parties.

(i) Pending completion of the entire process as per this order thereshall not be any allotment of shares or transfer or sale of shares AB

C

D

E

F

G

H

Aexcept as indicated in this order.(j) The company shall bear the fee of independent valuer andauditors.

(k) Both Petitions are disposed of accordingly. No order as tocosts.”B

3. The appellants thereupon filed Company Appeals under Section421 of the Companies Act, 2013, viz., Company Appeals (AT)272 and273 of 2017 against the Common Order in the aforesaid Petitions. TheNational Company Law Appellate Tribunal, New Delhi (NCLAT) hasaffirmed substantially the Order passed by the NCLT. The modificationCwas only in regard to paragraph-92C (supra) of the Order of the NCLT.The NCLAT substituted the words ‘financial year 2008-2009’ in placeof ‘2009-2010’. Affirming the rest of the directions, the Appeals weredisposed of. It is this Order, which is impugned in the Appeals beforethis Court.D4. We have heard Smt. Meenakshi Arora, learned Senior Counselon behalf of the appellants. We have heard, on the other hand, Shri NitinRai, learned Senior Counsel, on behalf of the V.P. Patel Group and ShriMalak Manish Bhat, learned Counsel on behalf of the Sheth Group.

5. The bone of contention between the parties has narrowed downEto one issue. The appellants take exception to the Order of the NCLAT,affirming the direction of the NCLT, by which, allotment of shares inrespect of the increased share capital, was to be made to all the existingshareholders of the company as on 18.12.2009, in proportion to theirshareholding. It was the further direction in paragraph-92A (supra) ofFthe NCLT, that in case, if any of the shareholders is not willing to subscribefor additional shares, then, those shares shall be allotted to othershareholders, taking their options again, proportionate to theirshareholdings. Smt. Meenakshi Arora, after taking us through thesequence of facts, would point out that after finding that there was nomismanagement or oppression, as alleged andthe NCLT and the NCLATGhave clearly erred in regard to the above matter. She would submit thatfirst respondent is a private limited company. Section 81 of the Act didnot, as such, apply to the company. Nevertheless, this is a case wherethe appellants have made an offer to all the existing shareholders and,what is more, in the ratio of 1:1. All that happened was since the companywas advised that the authorised capital must be increased so that itsH

capital requirements could be considered, the appellants decided to go infor increase in the authorised capital. The authorised capital was increasedfrom Rs.1 crore to Rs.2 crores. She reminds us that this is a case wherethe Sheth Group quit in April, 2009 by resigning from the Board ofDirectors. They took away nearly 90 lakhs. On account of their activities,the company had run into rough weather. It was, in such circumstances,the need for increase in the authorised capital was felt. It is furtherpointed out that though the Sheth Group and the V.P. Patel Groupattempted to impugn the decision to increase the authorised capital as anact of mismanagement and oppression, significantly, the NCLT andNCLAT have found no merit in the same. Therefore, once the increasein the capital was not found illegal or malafide, it is inexplicable, it issubmitted, as to how the actual allotment of the shares could be foundtainted. The rationale in the reasoning, viz., that the allotment was‘defective’, was insupportable, it is contended. All the shareholders weregiven an equal opportunity to apply for shares in proportion to their existingshareholdings (1:1). They could apply for lesser number of shares. Theycould also apply for more number of shares. Lastly, they could exercisethe choice to not apply for any shares at all. This choice was madeavailable to all the shareholders across the Board falling in the threeGroups. The fact of the matter is the Sheth group and the V.P. PatelGroup did not apply. Without finding any illegality otherwise, the NCLTand NCLAT, it is contended, clearly erred.

6. Per contra, Shri Nitin Rai, learned Senior Counsel, would pointout that the Court must bear in mind that the first respondent is a closelyheld company. It is more or less a quasi-partnership and it ran on trust.The authorised capital of the company was Rs.1 crore. Without thecompany, in the General Body Meeting, resolving to increase theauthorised capital, there were no shares, which could have been allottedby the Board of Directors. In this regard, he sought support fromJudgment of this Court reported in Nanalal Zaver and another v.Bombay Life Assurance Company Limited and another1. In otherwords, the authorised capital was increased by the decision of the GeneralBody, only on 27.01.2010. However, the Board of Directors decided toallot shares, which were non-existent, prior to 27.01.2010. The action ofthe Board of Directors was unauthorised and impermissible in law. Hefurther pointed out that even the V.P. Patel Group and also the Sheth AB

C

D

E

F

G

AGroup had evinced and manifested their dispute in a formal manner withthe Registrar of Companies. On account of the dealings of the appellants,the parties were at loggerheads. Though, the contents of the notice sent,was disputed, however, the matter was not pressed. It is further contendedthat the NCLT has found the allotment flawed. This is for the reasonthat under law, when allotment of further shares is made by the BoardBof Directors, the question of allotment of shares, which are not taken upby the shareholders, must be taken up only after the shareholders, in thefirst place, decline the allotment. In other words, in this case, the appellantshave rolled-up the initial allotment, as also the issue relating to furtherallotment of shares in a single decision and notice. The NCLT hasCfrowned upon the matter and rightly so. No prejudice will be caused, ifimpugned direction is upheld. He did take up the contention that theshares of the company were not got valued and it was issued on par,viz., at face value of Rs.10/-. The value did not do justice to the actualvaluation of the company, which would have been on the higher side.But fairly, Shri Nitin Rai acknowledged that this aspect was not, as such,Dcanvassed before the Tribunal. There is no offer made after 27.01.2010he points out. He next complained that even proceeding on the basis thatthe decision to increase the authorised capital was well advised, it isnoteworthy that only Rs.21 lakhs came in by way of the allotment of theadditional capital. In other words, though the authorised capital wasEincreased from Rs.1 crore to Rs.2 crores and the whole effort waspurportedly to infuse fresh capital, in substance, only Rs.21 lakhs cameinto the coffers of the first respondent company. The additional capitaloffered was subscribed only in a sum of Rs.90 lakhs. Besides Rs.21lakhs, which was brought in, the balance of Rs.69 lakhs was shownaccounted by way of cancelling the loan due from the first respondentFcompany to the appellants. This would nail the lie of the appellants thatthey had acted bonafide and in the best interest of the company. It iscontended that the object of the appellants was to wrest control of aclosely held company and it is this impermissible object, which alone willbe frustrated by this Court upholding the concurrent directions of theGNCLT and NCLAT.

7. Shri Malak Manish Bhat would echo the contentions addressedby Shri Nitin Rai. The fact that the company is closely held family andGroup Unit, is stressed.

ANALYSIS

8. On 24.11.2009, in response to the proposal for a term-loanmade by the appellants, the Bank of Baroda, undoubtedly, communicatedthe following:

“1. We advise you to increase Share Capital for minimum level ofRs.2Crs.

2. We advise you to expand the board of directors so personalguarantee of additional eligible can be available to the bank forincrease of bank’s exposure.

3. We request you to let us know the full details of Reserve andSurplus mentioned in your Balance Sheet as of 31.03.2009.”

9. On 08.12.2009, the first respondent company send a Notice toits Directors, four in number, viz., the appellants and Respondents 2 and3 (the V.P. Patel Group). It must be remembered that the Directorsrepresenting the Sheth Group had resigned earlier in the year. Themeeting was convened to take place on 18.12.2009. In the Agenda forthe Meeting, we find the following, inter alia:

“2. To take note of letter dated 24[th] November 2009 receivedfrom Bank of Baroda, instructing Company to infuse additionalfunds by way of equity for proposal submitted for Term Loan.

3. To decide on the methology to increase the equity.

4. To consider increase in Authorised Share Capital of Companyfrom Rs.1,00,00,000/- to Rs.2,00,00,000/-.”

10. The Meeting did take place on 18.12.2009. The Directors ofthe V.P. Patel Group, viz., Manish Patel and Krunal Patel were grantedleave of absence. The first appellant Chaired the Meeting. The secondappellant was the other participant as Director. The following is theMinutes of the Meeting:

“MINUTES OF MEETING OF THE BOARD OF DIRECTORSOF AMBIKA FOOD PRODUCT PRIVATE LIMITED HELDON 18TH DECEMBER, 2009 AT REGISTERED OFFICE OFTHE COMPANY AT RAJODA PO. BAVLA - 382 220AHMEDABAD AT 11.00 A.M.

A

B

C

D

E

F

G

H

A

B

C

D

E

F

G

H

1. Mr. Hasmukhbhai Madhavlal Patel.

2. Mr. Dilipkumar M. Patel

1. CHAIRMAN OF THE MEETING

Mr. Hasmukhlal Patel, with the consent of the Directors present,chaired the meeting.

2. LEAVE OF ABSENCE

Leave of absence was granted to Mr. Manish Patel, Director andMr. Krunal Patel, Director.

3. TAKE NOTE OF THE LETTER RECEIVED FROMBANKOF BARODA:

It was informed to the Board that Company is in receipt of letterdated 24[th ]November, 2009, advising Company to bring in additionalequity of Rs. 100 Lacs in order meet its requirement for proposedTerm Loan application. Copy of the letter received from the Bankduly initiated by the Chairman of the purpose of identification wasput before the Board. The Board took note of the same.

4. TO DECIDE MEHODOLOGY TO INCREASE THEEQUITY.

It was informed to the Board that in order to raise the equity itwould be appropriate that initially offer is made to the existingshareholders. The Board discussed in detail and was of the opinionthat the considering the present equity offer be made to exitingshareholders of Company to apply for one equity shares for everyshare held. It was then resolved as under:

RESOLVED that pursuant to the requirement of the fresh fundsfor expanding the business activity of the Company, Company beand is hereby authorized to issue 10,00,000 (Ten Lakh) equityshares of Rs. 10/- each at per to the existing shareholders in theratio of one share for every share held.

RESOVLVED FURTHER that shareholders shall have right toapply for and in case of shares not being subscribed by any othershareholder be allotted to the shareholder who is willing to takeadditional shares.

RESOLVED FURTHER that a notice inviting the shareholdersto subscribe for an get allotted their entitlement be forwarded tothe shareholders in this regards and the same shall be consideredfor allotment upon authorized capital for the Company having beenincreased.”

11. Following this decision, Notice of Extraordinary General Meetingto be held on 27.01.2010, was given. The shareholders were informedthat as decided in the Meeting on 18.12.2009, the company proposed toissue further shares to its existing members in the ratio of 1:1. Interestedmembers were required to exercise their rights on or before the05.02.2010. Next, it was indicated as follows:

“Please note that this is advance intimation and eligibility to applyfor shares would be subject to approval of the increase in authorisedcapital by the shareholders in the EGM to be held on 27[th] January,2010.

Application Form for applying shares is attached with this letter.”

12. The Special Business, viz., increasing the authorised capitalwas specified. The first appellant, as Chairman, was also authorised togive effect to the Resolutions.

13. The Application Form for applying and getting the equity sharesin the first respondent company, pursuant to the decision dated 18.12.2009,may be noticed:

“APPLICATION FORM

AMBIKA FOOD PRODUCT PRIVATE LIMITED

NH-8, VILL. RAIODA: TALUKA: BAVLA: DIST:AHMEDABAD

PIN:382220

Application for applying and getting equity shares allotted in AmbikaFood product Private Limited pursuant to the decision taken bythe Board of Directors in their meeting held on 18[th] December,2009.

Name of the Share Holder:

A

B

C

D

E

F

G

H

[2023] 8 S.C.R.

AAddress:

Folio No.:

Number of Share Held: equity share ofRs.10/- each at ParNumber of Shares eligible for application: ___ equity sharesBNote for option to be exercised:

- Please tick on the appropriate option below

- Only one option can be exercised

- In correct and more than one selection shall invalidate the formCand it shall be presumed that last option is exercised.

- In case of non-selection of any option, it shall be presumed, thatlast option is exercised.

1. I/We wish to apply for the full number of shares for which I/We am/are eligible.

D

a. I/We enclose herewith an amount of Rs. _____ /- towards oursubscription money by way of DD/PO/Cheque No. ___ dated____ I I 2010.

b. We hereby authorized the company to convert the amount ofEunsecured deposit of Rs. _____ /- standing to our credit in thebooks of the Company.

2. We wish toapply for lesser no. __ Equity Shares from which I/We am/are eligible.

a. I/We enclose herewith an amount of Rs. ——/- towards ourFsubscription money by way of DD/PO/Cheque No .. ___ dated I/ 2010.

b. We hereby authorize the company to convert the amount ofunsecured deposit of Rs. _____ /- sanding to our credit in thebooks of the Company.

G3. We wish to apply for higher no. __ Equity Shares from whichI/We am/are eligible.

a. I/We enclose herewith an amount of Rs. ____/- towards oursubscription money by way of DD/PO/Cheque No. ___ dated I12010.

H

b. We hereby authorize the company to convert the amount ofunsecured deposit of Rs. _____ /- sanding to our credit in thebooks of the Company.

4. We do not wish to apply for any shares of the company.

I/We hereby agree to accept the Equity Shares applied for onsuch smaller number as may be allotted to me/us subject to theterms of Application Form and Articles of Association of theCompany.

I/We undertake that I/We will sign all such other documents anddo all such other acts. necessary on my/our part to enable me/usto be registered as the holder(s) of the Equity Shares which maybe allotted to me/us. I/We authorized you to place my/our name(s)on the Register of Members of the Company as the holder(s) ofthe equity shares and to register and address(es) as given below.

I/We note. that the Board of Directors are entitled in their absolutediscretion to accept or reject this application in whole or in partwithout assigning any reason whatsoever.

I/We agree to the allotment of shares subject to the Rules,Regulations and Conditions laid down by Financial Institutions,Securities Exchange Board of India if any and Board of Directorsof the Company.

I am/we are Indian National(s) resident in India and 1 am/we arenot applying for Equity Shares as nominee(s) of any person residentabroad or a foreign national.

(Signature of First Holder)(Signature of Second Holder)

(Signature of Third Holder)

Date:

Place:

Note:

Above signatures should tally with the signatures on record.”

14. On 18.12.2009, the second respondent, viz., Manish KumarV. Patel, wrote to the Registrar of Companies, Gujarat, requesting thatthe first respondent company be marked as a disputed company and notto take any documents, papers, forms, including e-forms, on record, as A

B

C

D

E

F

G

H

Aper decision of majority, are not considered. It is stated in the letter thatthey would be deprived of their basic rights. It is stated that the appellantsmay increase the authorised capital and allot shares to them andfraudulently take the control of the company. It is further stated thatthey were in the process of convening Extraordinary General Meeting,to be held shortly, to inform the shareholders and resolve to remove theBappellants from the MCA-21 Portal and Record of ROC.We find alongwith the same, a communication signed by shareholders, which combinedthe Sheth Group and the V.P. Patel Group and consisted of 68.98 percent of the shares, supporting the letter seeking to treat the firstrespondent company as disputed company.C

15. Next, we must notice the Minutes of the Extraordinary GeneralMeeting of shareholders held on 27.01.2010. The appellants were theMembers, who were present. There was no one from the Sheth Groupor the V.P. Patel Group. The authorised share capital of the companywas increased to Rs.2 crores. On the very same day, a Meeting tookDplace of the Board of Directors. The appellants participated in theMeeting. Respondents 2 and 3 were given leave of absence. We findthe following from the Minutes of the said Meeting:

“MINUTES OF MEETING OF THEBOARD OF DIRECTORSOF AMBIKA FOOD PRODUCTPRIVATE. LIMITED HELDEON 27, JANUARY, 2010 ATREGISTERED OFFICE OF THECOMPANY AT RA.JODA PO.BA VLA - 382 220AHMEDABAD AT 03.00 P.M.

1. Mr. HasmukhbhaiMadhavlal Patel.F2. Mr. Dilipkumar M. Patel

I. CHAIRMAN OF THE MEETING

Mr. Hasmukhlal Patel, with the consent of the Directorspresent,chaired the meeting.G2. LEAVEOF ABSENCE

Leave of absence was granted to Mr. Manish Patel, Director andMr.Krunal Patel, Director.

3. OUT COME OF EXTRA ORDINARY GENERALMEETING:H

It was informed to the Board that Share Holders of the Companyhaspassed Ordinary Resolution for increase in Authorized ShareCapitalof theCompany from Rs. 1 ,00,00,000/- to Rs. 2,00,00,000/-. TheBoard has took note of the same. Any one of the director oftheCompany was then authorized to file the necessary Form 5with theoffice of Registrar of Companies.

A

B

4. BOARD MEETING FOR ALLOTMENT OF SHARES:PROP

It was informed to the Board that as mentioned Shares Holdersof theCompany has passed resolution for increase of AuthorisedShareCapital and therefore, and as per the application and noticealreadycirculated the last date of receipt of application is 5thFebruary, 2010.It is therefore. proposed to convene meeting ofthe Board of Directorsis proposed. to be held on 9th February, 20l 0, for considering allotment of further issue of Equity Shares.The Board disuccsed the matter and decided to hold Board Meetingon 9th February, 2010. It was also informed to the Board that theCompany is taking steps to inform the shareholders about theoutcome of the meeting so that they can take immediate steps tosubscribe to the equity.

C

D

5. VOTE OF THANKS:

There being no other business, the meeting ended with vote ofthanks to the chair.

E

Date: 27.01.2010

DIRECTOR

(HASMUKHBHAI PA TEL)FCHAIRMAN”

16. Pursuant to the same, it is the specific case of the appellantsthat the shareholders were sent Notices by Registered Post about thedecision of the Extraordinary General Body Meeting so that they couldtake steps to subscribe to the additional capital sought to be raised. Thereis, indeed, evidence of the Notices. It is true that the respondents stilldispute the receipt of the same.

G

17. On 09.02.2010, we find the following Minutes of the Meetingof the Board of Directors, of the said date:

H

SUPREME COURT REPORTS[2023] 8 S.C.R.

A“MINUTES OF MEETING OF THE BOARD OF DIRECTORSOF AMBIKA FOOD PRODUCT PRIVATE LIMITED HELDON 9[TH] FEBRUARY, 2010 AT REGISTERED OFFICE OF THECOMPANY AT RAJODA PO. BA VLA - 382 220AHMEDABAD AT 11.00 A.M.

The following Directors were present:

B

l. Mr. Hasmukii’bhaiMadhavlal Patel.

2. Mr. Dilipkumar M. Patel

1 . CHAIRMAN OF THE MEETING

CMr. Hasmukhlal Patel, with the consent of the Directors present,chaired the meeting.

2. LEAVE OF ABSENCE

Leave of absence was granted to Mr. Manish Patel, Director andMr. Krunal Patel, Director.D

3. ALLOTMENT OF SAHRES:

It was informed to the Board that Company has received 7Applications from Share Holders, who have shown their interestin further issue of Company. Some of the Share Holders has madeEapplication for higher number of shares then what were offeredto.

The Board then considered the all application received and havingfound the same in order passed the following resolutions:

RESOLVED THAT 9,00,000 Equity shares of Rs. 10/- (TenFOnly)@ per be and are hereby allotted to the applicants as under:- RESOLVED FURTHER THAT company do issue necessaryshare certificates for the above shares within the stipulated periodand Mr. Hasmukhlala Patel ad Mr. Dilipkumar Patel be and areauthorised to sign the said certificates under the Common Seal ofthe Company.

B

RESOLVED FURTHER THAT the necessary Return ofAllotment in Form 2 be filed with the Registrar of Companies,Gujarat.

C

Date: 09.02.2010

DIRECTOR

(HASMUKHBHAI PATEL)CHAIRMAN”

D

THE FINDINGS OF THE NCLT

18. Answering the question, as to whether increase in the paid-upcapital from Rs.1 crore to Rs.2 crores in the Extraordinary GeneralBody Meeting dated 27.01.2010 was an act of oppression or not, theNCLT finds that Notices for the Board Meeting on 18.12.2009 weresent to all the Directors by registered post. In the Board Meeting on18.12.2009, decision was taken to convene the shareholders meeting on27.01.2010 to increase Authorised Share Capital. On the date of theBoard Meeting itself, it was found that the V.P. Patel Group wrote to theRegistrar of Companies that the H.M. Patel Group (appellants) is goingto increase the Authorised Capital.Thus, V.P. Patel Group was havingknowledge, it was found, of the proposal to increase the AuthorisedCapital. After noting the contention of the Sheth Group and V.P. PatelGroup that they were insisting on the appellants sending communicationby registered post, acknowledgment due, the Notice dated 08.12.2009to convene the Board Meeting and Notice of the Extraordinary GeneralMeeting dated 24.12.2009, were sent by registered post. The Tribunalfinds that the V.P. Patel Group shareholders were having knowledge ofthe proposal to increase the share capital. The Sheth Group also, withknowledge, did not chose to participate in the Board Meeting on EF

GH

A18.12.2009 and the Extraordinary General Body Meeting on 27.01.2010.The Tribunal, therefore, rejected the contention of the V.P. Patel Groupand the Sheth Group that they had not received Notice or had noknowledge of the Board Meeting on 18.12.2009 or the ExtraordinaryGeneral Body Meeting on 27.01.2010. Next, the Tribunal finds that theMinutes of the Board Meeting and the Extraordinary General BodyBMeeting clearly show that after complying with the provisions of theCompanies Act and Articles of Association, Resolutions were passed toincrease the Authorised Share Capital. Pursuant thereto, Resolutionswere passed to invite applications from shareholders. Increase in sharecapital and the allotments had not been given effect since no returnsCwere recorded with the Registrar of Companies because of the objectionsof the V.P. Patel Group. Therefore, ‘the increase in the share capitaland the allotment of shares itself and allotment of shares itself, is not anact of oppression of the rights of the V.P. Patel Group and the ShethGroup’, is found by the NCLT. It is further found that the removal of theappellants, as directed, was not valid and could not be upheld. Under theDpoint, ‘outcome of financial irregularities alleged by the three Groups’, itis found that three Groups were at loggerheads. There appeared to beno possibility of the three Groups coming together and conducting affairsof the first respondent company. It is next pointed that the findings of theTribunal would show that there are no established acts of oppressionEand mismanagement except some financial irregularities, which requireexamination by the Board of Directors. Thereafter, we have noticed thedirections in paragraph-92 (supra).

19. Next, is the finding in the impugned Order in regard to allotment.The NCLAT also finds that the contention of the Sheth Group and V.P.

FPatel Group that they did not get Notice of the Extraordinary GeneralBody Meeting, could not be believed. The need to increase the sharecapital and the circumstances, which led to it, canvassed by the appellants,including the letter dated 24.11.2009 issued by the Bank of Baroda, wasfound reliable. Dealing with the point pertinent to the Appeals before us,viz, the actual allotment of shares on increase of share capital, it is, interGalia, found that there did not appear to be any discussion by the NCLTregarding allotment of shares.

20. Next, the NCLAT finds that the allotment in the ratio of 1:1may not be oppressive, it is found. However, the manner in which allotmentis done, may be illegal and, thus, oppressive. The direction of the NCLTHwas found to be not without basis in the records. Referring to the forms for applying for shares, it is noted that they are dated 04.02.2010 andthey show that the applications were not in the ratio of 1:1 but muchbeyond that. For example, it is stated that the wife of the first appellantwas having just 20 equity shares. She applied for 98000 equity shares.The contention of the V.P. Patel Group that the members of the appellantGroup calculated in advance and applied so as to consume the whole ofthe increased share capital, anticipating in advance that they can get it,is noted. A reference was made to the Articles of Association and thereinthe following Article referring to General Authority is referred to asfollows:

“General Authority

Wherever in the Companies Act, 1956 it has been provided thatthe Company shall have any right, privilege or authority or thatCompany can not carry out any transaction unless the Companyis so authorised by its Articles then in that case, Articles herebyauthorise and empower the Company to have such rights, privilegeor authority and to carry out such transaction as have beenpermitted by the Companies Act, 1956.”

21. The argument that in view of the Article, Section 81 of theAct would apply, is noted. It is further noted that even if the appellantshad issued Notice in anticipation of the members to apply on increase ofshare capital, which was, till that point of time, not decided, the offercould not have been of more than 1:1 and the right procedure wouldhave been that after the share capital was increased, claims of 1:1 shouldhave been considered and only, thereafter, the unsubscribed portion, couldbe offered. The argument based on Dale & Carrington Invt. (P) Ltd.and another v. P.K. Prathapan and others2, was noted.

22. It was next found that the act of increase in the share capitalcould be upheld. The distribution of shares was ‘defective’. Even if inanticipation of increase in share capital, if applications in proportion toshare already held could be made, but unsubscribed shares could bedisposed only after the shareholder declined to accept the shares offered.For this, it is found that there could not have been applications inanticipation. It is next found that the proper and legal procedure has notbeen followed. The Board Resolution dated 09.02.2010 could not beupheld.

2 (2005) 1 SCC 212

AB

C

D

E

F

G

H

A23. The direction of the NCLT was upheld.

24. We can find that the case of the V.P. Patel Group and theSheth Group based on there being mismanagement and oppression bythe appellants, has otherwise been rejected. The complaint that theappellants acted in an oppressive manner or mismanaged the Company,Bwhen it decided to increase the authorised capital, has also been rejected.The NCLT has not given any reasoning, as such, as found by the NCLATfor the direction to allot shares to the V.P. Patel Group and the ShethGroup. The NCLAT appears to, however, support the direction on thebasis we have noted above.

C25. Shri Nitin Rai emphasised that the Board of Directors couldnot have allotted the shares, when the existing authorised capital wasalready subscribed and, what is more, paid-up. Putting the cart beforethe horse, as it were, applications were invited from shareholders toapply for shares which were not existing. In other words, it was onlyafter the increase in the authorised capital by the decision of theDExtraordinary General Body Meeting held of the shareholders of27.01.2010, from Rs.1 crore to Rs.2 crores, that the Board could haveresolved to invite applications. In this regard, he drew support fromJudgment of this Court in NanalalZaver and another v. Bombay Life3Assurance Company Limited and others.E26. In the decision reported in Needle Industries (India) Ltd.and others v. Needle Industries Newey (India) Holding Ltd. andothers4, we notice the following statements:

“110. Before we leave this topic, we would like to mention thatthe mere circumstance that the Directors derive benefit asFshareholders by reason of the exercise of their fiduciary power toissue shares, will not vitiate the exercise of that power. As observedby Gower in Principles of Modern Company Law, 4th Edn., p.578:

“As it was happily put in an Australian case they are “not requiredGby the law to live in an unreal region of detached altruism and toact in a vague mood of ideal abstraction from obvious facts whichmust be present to the mind of any honest and intelligent manwhen he exercises his power as a director.”

3 AIR 1950 SC 172/1950 SCC 137H4 (1981) 3 SCC 333

The Australian case referred to above by the learned Authoris Mills v. Mills [60 CLR 150, 160] which was specificallyapproved by Lord Wilberforce in Howard Smith [1974 AC 821,831] . In NanalalZaver [1950 SCC 137 : AIR 1950 SC 172 :1950 SCR 391, 394] too, Das, J. stated at p. 425 that the trueprinciple was laid down by the Judicial Committee of the PrivyCouncil in Hirsche v. Sims [1894 AC 654, 660-61 : 64 LJ PC 1 :71 LT 357 : 10 TLR 616] thus:

“If the true effect of the whole evidence is, that the defendantstruly and reasonably believed at the time that what they did wasfor the interest of the company, they are not chargeable with dolusmalus or breach of trust merely because in promoting the interestof the company they were also promoting their own, or becausethey afterwards sold shares at prices which gave them largeprofits.”

111. Whether one looks at the matter from the point of viewexpressed by this Court in NanalalZaver [1950 SCC 137 : AIR1950 SC 172 : 1950 SCR 391, 394] or from the point of viewexpressed by the Privy Council in Howard Smith [1974 AC 821,831] the test is the same, namely, whether the issue of shares issimply or solely for the benefit of the Directors. If the shares areissued in the larger interest of the Company, the decision to issueshares cannot be struck down on the ground that it has incidentallybenefited the Directors in their capacity as shareholders. We must,therefore, reject Shri Seervai’s argument that in the instant case,the Board of Directors abused its fiduciary power in decidingupon the issue of rights shares.”

27. While on the said decision, we find it apposite that bearing inmind the complaint of Shri Nitin Rai, learned Senior Counsel that theshares were not got valued and they were issued without a premiumthat we notice the following statement:

“120. Finally, it is also not true to say, as a statement of law, thatDirectors have no power to issue shares at par, if their marketprice is above par. These are primarily matters of policy for theDirectors to decide in the exercise of their discretion and no hardand fast rule can be laid down to fetter that discretion. As observed AB

C

D

E

F

G

H

Aby Lord Davey in Hilder v. Dexter [(1902) AC 474, 480: 71 LJCh 781 : 87 LT 311 : 18 TLR 800] : “I am not aware of any lawwhich obliges a company to issue its shares above par becausethey are saleable at a premium in the market. It depends on thecircumstances of each case whether it will be prudent or evenpossible to do so, and it is a question for the directors to decide.”BWhat is necessary to bear in mind is that such discretionary powersin company administration are in the nature of fiduciary powersand must, for that reason, be exercised in good faith. Mala fidesvitiate the exercise of such discretion. We may mention that inthe past, whenever the need for additional capital was felt, or forCother reasons, NIIL issued shares to its members at par.”

A

28. Quite apart from the fact that, as noticed by us earlier thatShri Nitin Rai had stated fairly that this point was not urged as such, theaforesaid statement of the law, assures the Court that there may be nomerit in the said contention as well, in the facts.D

29. Next, we may notice the Judgment of this Court in Dale&Carrington Invt. (P) Ltd.(supra). The said case has been referred toby the NCLAT as also the learned Counsel for the respondents. ThisCourt has proceeded to take the view that Directors of a private limitedcompany are to be tested on a much finer scale in order to rule outEmisuse of power.The Court held:

“11. … It follows that in the matter of issue of additional shares,the Directors owe a fiduciary duty to issue shares for a properpurpose. This duty is owed by them to the shareholders of thecompany. Therefore, even though Section 81 of the CompaniesFAct, 1956 which contains certain requirements in the matter ofissue of further share capital by a company does not apply toprivate limited companies, the Directors in a private limitedcompany are expected to make a disclosure to the shareholdersof such a company when further shares are being issued. Thisrequirement flows from their duty to act in good faith and makeGfull disclosure to the shareholders regarding affairs of a company.The acts of Directors in a private limited company are required tobe tested on a much finer scale in order to rule out any misuse of-power for personal gains or ulterior motives. Nonapplicability ofSection 81 of the Companies Act in case of private limitedcompanies casts a heavier burden on its Directors. Private limited H

companies are normally closely held i.e. the share capital is heldwithin members of a family or within a close-knit group of friends.This brings in considerations akin to those applied in cases ofpartnership where the partners owe a duty to act with utmostgood faith towards each other. Non-applicability of Section 81 ofthe Act to private companies does not mean that the Directorshave absolute freedom in the matter of management of affairs ofthe company. In the present case Article 4(iii) of the Articles ofAssociation prohibits any invitation to the public for subscriptionof shares or debentures of the company. The intention from thisappears to be that the share capital of the company remains withina close-knit group. Therefore, if the Directors fail to act in themanner prescribed above they can in the sense indicated by usearlier be held liable for breach of trust for misapplying funds ofthe company and for misappropriating its assets.”

30. It is true that the appellant had 30.80 per cent of the paid-upshare capital. The V.P. Patel Group had 24.20 per cent of the paid-upshare capital. The Sheth Group had 45 per cent of the paid-up sharecapital. This is when the authorised capital of the Company was Rs.1crore. The position, after the authorised capital was increased to Rs.2crores, on the other hand, is as follows:

The appellants-Group shareholding has increased to 63.58% ofthe paid-up share capital. The shareholding of the V.P. Patel Groupstands at 12.74% of the paid-up share capital. The shareholdingof the Sheth Group is 23.68% percentage of the paid-up sharecapital.

31. The appellants were at the helm of the affairs, undoubtedly, ofthe first respondent-Company. The first appellant was the Chairman ofthe Company. Somewhere in April, 2009, the Sheth Group Directors hadresigned. The Board of Directors consisted of the appellants and twoDirectors belonging to the V.P. Patel Group. There is a concurrent findingthat the decision taken by the appellants to increase the authorised sharecapital cannot be treated as an act of oppression or mismanagement.The only question is whether oppression has been occasioned by themanner in which the allotment of the additional shares was done.

32. The first respondent is a private limited company. Section81(3) of the Act, expressly exempted from the purview of the provision, AB

C

D

E

F

G

H

Aa private limited company. The same notwithstanding, as held by thisCourt in Dale & Carrington Invt. (P) Ltd.(supra), the conduct of theDirectors is to be judged on a higher yardstick. The question would, inthe ultimate analysis, trickle down to, whether the Directors acted in thebest interest of the Company or were they motivated to consolidate theirpower in the Company or maintain the power in the Company. Did theBDirectors act bonafide in that, when a decision was taken to increasethe Authorised Share Capital, they were driven by the intention to side-line the other stakeholders in the Company?

33. The fact that the Directors may also benefit from a decisiontaken primarily with the intention to promote the interest of the Company,Ccannot vitiate the decision. In other words, if in the implementation ofthe decision taken primarily with a view to safeguard the interest of theCompany, the appellants have made a gain, it cannot by itself render thedecision vulnerable.

34. An observation is found in the impugned Order that wife ofDthe first appellant had 20 shares and she has been allotted 96000 shares.At first blush, this leads to suspicion and even shock. However, let usexamine what exactly happened. The Board of Directors took a decisionto increase the Authorised Share Capital from Rs.1 crore to Rs.2 crores,following the advice given by the Bank of Baroda. This was a perfectlyEjustified decision, being the need of the hour. Since, the Authorised ShareCapital is part of the Memorandum of Association of the Company, anincrease in the same would be permissible only after it is endorsed in ameeting of the shareholders. Such a meeting was convened on27.01.2010. It is true that even prior to such a meeting, the Board ofDirectors had resolved to invite applications from shareholders. The formFof application has been produced before us, which we have extracted.The shareholder could, in terms of the form, do four things:

i.Since the Board had resolved to allot shares in a ratio of1:1, the shareholder could apply for one share for everyone share held by him; G

ii.The application form further contemplated that theshareholder could indicate that he wished to apply for lessernumber of shares than he was entitled to;

iii.A shareholder could apply for more number of shares thanhe was entitled to; H

HASMUKHLAL MADHAVLAL PATEL v. AMBIKA FOODPRODUCTS PVT. LTD. [K. M. JOSEPH, J.]

iv. Lastly, he could express his disinclination to apply for anyshares.

35. It is in the backdrop of this form that we must continue withthe narrative. The shareholders from the V.P. Patel Group and the ShethGroup, admittedly, did not apply seizing the opportunity given to them.They did not participate in the Extraordinary General Body Meetingheld on 27.01.2010 by which the Authorised Capital was increased.Though there is some controversy sought to be raised that theshareholders were not sent any intimation by way of reminder of theirright to apply for the shares, we are inclined to hold that the communicationwas indeed sent in keeping with the decision taken by the Board ofDirectors, following the Extraordinary General Body Meeting held on27.01.2010. The members of the appellants Group, on the other hand,applied for shares. Since, it was contemplated that shareholders couldapply not only in the ratio of 1:1 but for larger number of shares,apparently, the members of the appellants Group, applied for more numberof shares. Thus, though the wife of the first appellant may have beenentitled to only 20 shares, if the rights issue was limited to ratio 1:1, sinceit was decided to give an opportunity to shareholders to apply for moreshares than they held and as, apparently, shares were available to beallotted in numbers far greater than what the shareholders were actuallyholding, the wife of the first appellant, apparently, came to be allotted theseemingly disproportionate number of shares. If the shareholdersbelonging to the V.P. Patel Group and the Sheth Group had also appliedfor a larger number of shares than what they held and there was anydiscrimination or rejection of their application seeking greater number ofshares, then, there would have been, indeed, an occasion to find that anact of oppression had been perpetuated. In the absence of any applicationby members of the V.P. Patel Group and the Sheth Group for shares inany number, we are unable to perceive or characterise the act asoppressive.

36. The respondents pointed out that from the money available, asum of nearly 25 lakhs was given to the member of the appellants-Group.

37. As regards the last complaint, the appellants would point outthat actually all that happened was repayment of money brought in earlierby appellant-Group, which was parked with the Company and inconnection with the marriage of a family member, the amount was A

B

C

D

E

F

GH

Areturned. It must be noticed that the allegations and responses from bothsides are the subject matter of the audit. We cannot be deflected by thesame in ruling on the ‘defect’ or alleged illegality in the matter of allotmentof the shares.

38. The facts in Dale & Carrington Invt. (P) Ltd.(supra) areBclearly distinguishable. The case represented on facts a situation, where,the efforts were solely directed at consolidating and cornering of powerby the person in question. In this case, from the facts, as recounted, weare inclined to think that the shares were offered to the existingshareholders and, what is more, on a fair and equal footing. This is subjectto what we hold further.C

39. It is contended by respondents that though the Board decidedon 27.01.2001 to remind the shareholders of the right to apply, it was notdone. Per contra, the appellants contend that the notices were sent andthey were also produced. The respondents would however point outthat no finding has been rendered.D40. The Notice dated 27.01.2020 sent, reads as follows:

“27th January, 2010

To,

All the shareholders as per list enclosedESub.: Outcome of Extra Ordinary General Meeting.

Dear Sir,

We are pleased to inform you that members of theCompany remainpresent at the Extra Ordinary General Meeting of the CompanyFheld today, has passed Ordinary resolution for increaseinAuthorised Share Capital of the Company from Rs. 1Cr. to Rs.2 Cr.

Therefore, Board will go ahead with the propose further issue ofEquity Shares to existing members of the Company. We are onceGagain remind you that last date for furnishing application forsubscribingshares would be 5th February, 2010. Therefore,youare requested to exercise. your right before 5[th] February, 2010.

Thanking you,

Yours truly,

H

For Ambika Food Product Private Limited

Director”

41. Now, a contention is taken by respondents that the NCLAThas not found that it was served as such. We bear in mind the followingcircumstances, however. In regard to the Notice of Extraordinary GeneralMeeting dated 24.12.2009, a contention was taken by the respondentsthat the postal cover did not contain the papers of Notice but some othercommunications. Concurring with the NCLT, in its rejection of therespondents’ case, the NCLAT held as follows:

“28. It appears later the VP Patel Group and HM Patel Groupbefore NCLT took up stand that the postal covers sent did notcontain papers of Notice but they contained some othercommunications relating to the company. Thus in effect they triedto claim before the NCLT that the HM Patel Group was playingfraud. However, as the impugned order shows, the learned NCLThad taken up the contention on these grounds and although it wasdemonstrated before the NCLT that on opening the envelope cover,it had some papers other than Notice of EOGM, NCLT foundthat bare perusal of the envelopes which were being shown, itcould be seen by naked eye that they were once opened andagain sealed. Looking to such approach of these litigants, we willnot like to trust their contentions that they did not get notice of theEOGM.”

42. We would hold that in regard to the allotment of shares, therespondents Groups were put on notice and they must be treated ashaving refused to avail of the offer. There is a concurrent finding by theNCLT and NCLAT that the respondents were aware of the increase inshare capital as proposed. That the meetings were held in compliancewith the law, is concurrently found.

43. The NCLAT reasons that even if applications in proportion toshares already held could be made, unsubscribed shares could be disposedof only after there is a declining to accept the shares offered. It is furtherfound that there could not have been application in anticipation. Thismeans that it is the understanding of the NCLAT that while shares couldbe applied for, to the extent of 1:1 as offered, but as regards sharesbeing offered in excess of the said ratio, as permitted under the Board B

CD

E

F

GH

AResolution dated 18.12.2009, it would have been done only after ashareholder refused to take shares offered. A shareholder could notapply for excess shares anticipating that the other shareholders wouldnot take up the shares offered.

44. Now, in law, let us first proceed on the basis that the offerBwas made with the Authorised Capital being such that the acceptanceof the offer would keep the capital within the Authorised Capital.

45. A rolled-up offer would involve the following consequences:

A shareholder was free to not apply at all. A shareholder couldCapply for less than at the ratio of 1:1. He could apply for shares as perthe ratio of 1:1. Now, he could under the application form, apply forshares in excess. There was no limit. The legal limit to be crossed in law,is not in dispute. The law contemplates that shares must be subscribedto the extent of 90 per cent of the issued shares. There is no dispute thatit was subscribed to the extent of 90%. By permitting all shareholdersD‘equally’ to apply for shares as indicated hereinbefore, including forshares in excess of the ratio of 1:1, we are not shown any law whichstood breached. If all shareholders applied in excess of the entitlement,then, necessarily the Board would have been obliged to distribute theshares on a fair and equal basis, in fact. This contingency did not arise,Eas the respondents did not apply at all. If some from the respondentsGroup had applied, then, again the allotment would have been testedwith reference to the standard of fairness and equal treatment. Thiscontingency also did not arise. The shareholding became slanted in favourof the appellants Group only because they applied for more shares, whilethe respondents Group refused to participate. In the facts of the case,Fthe application for more shares by the appellants Group and allotment ofthe shares to themon the basis of the availability of the shares by reasonof the choice exercised by the respondents not to participate in theexercise, cannot be treated as defective, illegal or an act of oppression.

46. There is no case, that there was any impediment for theGrespondents to apply, once it is found that they were informed and awareof their right to apply.

In certain situations, a single act could found a case of oppression.This is not a case where allotment of additional shares was made toanyone other than the existing shareholders. This is a case where theH

terms were applied equally to all the existing shareholders. The changein shareholding, in that the appellants shareholding grew from 30.80% to63.58% is the result of the respondents refusal to apply despite beinggiven the opportunity.

TWO QUESTIONS SURVIVE

47. One of the complaints of the respondentsis that the purportedreason for the increase in the authorized capital and the allotment of theshares also was to infuse fresh funds. However, fresh funds came inonly to the tune of Rs.21 lakhs. The balance of the consideration for theshares allotted to the appellants group member is shown as debts duefrom the first respondent company to the members of the appellantsgroup being written off. Therefore, it is contended that the ostensiblereason for increase in authorized capital and for the allotment of theshares are fraught with absence of bonafides and the real intentionwas to capture controlling interest in the company. This is sought to bemet by the appellants by pointing out that in view of the loan remainingoutstanding, there was a skewed debt-equity ratio which was a clog andthe result of the company writing off the loan due from the appellantsgroup was to enable the company to present a better financial condition.The respondents would contend that loans were also owing to therespondent’s groups.

48. The second contention which remains is the fact that on18.12.2009 when the Board of Directors decided to issue 10 lakh sharesin the ratio of 1:1, and what is more, giving a right to the shareholders toapply for, and in case of shares not being subscribed by othershareholders, to be allotted those shares to those who were willing totake additional shares,it was all done in anticipation that the shareholderswould approve of the increase in the authorized capital from Rs.1 Croreto Rs.2 Crore. In other words, the very authority of the Board ofDirectors to decide upon to the further issue of shares is questioned as itinvolved the offer of shares being made when the authorized capitalwas Rs.1 Crore only. The cart could not be put before the horse. Thefirst step should have been to hold the shareholders meeting and theshareholders should have approved the increase in authorized capital. Itwas only thereafter that, in other words, the Board of Directors could dowhat it purported to do on 18.12.2009.

A

B

C

D

E

G

H

A49. Support is drawn in this regard from the judgment of this Courtin Nanalal Zaver (supra).

50. The case of the appellants on the other hand is that it wasmade clear in the decision of the Board of Directors meeting on18.12.2009 that a notice inviting the shareholders to subscribe in termsBof its decision as already noticed was issued and the applications wereto be considered for allotment only upon the authorized capital beingincreased. In other words, though it was resolved to issue 10 lakh sharesand to allot them in a ratio 1:1 with the option for the shareholders toapply for even higher number of shares as indicated in the minutes of aCmeeting on 18.12.2009,the applications to be received from theshareholders were to be considered only after the authorized capitalwas increased.

51. The decision in Nanalal Zaver(supra) was rendered by aBench of five learned Judges. Chief Justice Kania, in his opinion proceededDto dismiss the Appeal. Justice M.C. Mahajan and Justice S.R. Das wroteseparate concurring opinions. Justice B.K. Mukherjea also agreed thatthe Appeal must be dismissed and he substantially agreed with thereasoning of Justice S.R. Das. In the Company in question, the authorisedCapital was Rs.10 lakhs. The plaintiffs in the Suit, from which the casearose, were aligned with a certain Group, which had proceeded to buy-Eup the majority shareholding in the Company. It was to, apparently,‘protect the Company’ from the Group, which sought to acquire controllinginterest in the Company, that the Group in management of the Companydecided to issue the balance of the unissued Authorised Capital’. Theshares were issued in the ratio of 4:5 to the existing shareholders. It wasFfurther decided that any balance shares, which were not applied for,were to be disposed of by the Directors, in the manner they consideredbest. From the opinion rendered by Justice M.C. Mahajan, we find thefollowing to be one of the two questions, which was articulated:

“11…. (1) whether the issue of further shares by the DirectorsGwas in contravention of the provisions of Section 105-C of theIndian Companies Act, ...”

52. Section 105-C of the Companies Act, 1913 read as follows:

“105-C. Further issue of capital.—Where the Directors decideto increase the capital of the company by the issue of further H

HASMUKHLAL MADHAVLAL PATEL v. AMBIKA FOODPRODUCTS PVT. LTD. [K. M. JOSEPH, J.]

shares such shares shall be offered to the members in proportionto the existing shares held by each member (irrespective of class)and such offer shall be made by notice specifying the number ofshares to which the member is entitled, and limiting a time withinwhich the offer, if not accepted, will be deemed to be declined;and after the expiration of such time, or on receipt of an intimationfrom the member to whom such notice is given that he declines toaccept the shares offered, the Directors may dispose of the samein such manner as they think most beneficial to the company.”

60. The case of the appellants who were the unsuccessful plaintiffswas based on there being a violation of Section 105-C. In the opinion ofJustice M.C. Mahajan, we find the following formulation:

“18. … The language employed in the section admits of threepossible interpretations:

(1) that its scope is limited to cases where there is an increase inthe capital of the company according to the provisions of Section50;

(2) that the section covers within its ambit all issue of furthercapital whether made by increasing the nominal capital or by issuingfurther shares within the authorised capital;

(3) that the section has application only to cases where theDirectors issue further shares within the authorised limit.”

61. The appellants, in the said case, laid store by the secondinterpretation whereas the respondents (the company inter alia) tookshelter under the third interpretation. Justice M.C. Mahajan held, interalia, as follows:

“23. The third interpretation of the section finds support from thelanguage employed by the legislature in the opening part of thesection, wherein it is said:”Where the Directors decide to increasethe capital of the company by the issue of further shares….”(emphasis supplied) The Directors can only decide to increasethe capital at their own initiative when they issue further sharesout of the authorised capital. In no other case can the Directorsthemselves decide as to the increase in the capital of a company.Under Section 50 the capital can only be increased by a resolution AB

C

D

E

F

G

H

Aof the company. Once the company has increased the nominalcapital, then the Directors can issue shares within the new limit.Therefore the authority of the Directors, strictly speaking, in respectto the increase of capital is limited to an increase within theauthorised limit. They cannot by their own decision increase thenominal capital of the company. In view of this language the thirdBinterpretation of the section seems more plausible.”

A

62. Justice S.R. Das, in his separate concurring opinion, purportedto adopt slightly different reasons while concurring that the Appeal mustbe dismissed. Justice S.R. Das with whom Justice B.K. Mukherjea alsoCagreed, inter alia, held as follows:

“65. … The first question is whether the section contemplatesincrease of capital above the authorised limit, or only below theauthorised limit. The learned Attorney General appearing for theCompany urges that the words “further shares” must be read inDconjunction with the words “decide to increase the capital of thecompany” and, so read, must mean shares which are issued forthe purpose of increasing the capital beyond the authorised capital.He contends that Section 105-C has no application to this case.

66. Section 50 deals with, among other things, alteration of theEconditions of the memorandum of association of the company byincreasing its share capital by the issue of new shares. The veryidea of alteration of the memorandum by the issue of new sharesclearly indicates that it contemplates an increase of the sharecapital above the authorised capital with which the company gotitself registered. This increase can only be done by the companyFin a general meeting as provided in sub-section (2) of Section 50.This increase above the authorisedlimit cannot possibly be donebythe Directors on their own responsibility. Section 105-C, however,speaks of increase of capital by the issue of further shares. Thewords used are capital and not share capital and further sharesGand not new shares. It speaks of increase by the Directors.Therefore, the section only contemplates such increase of capitalas is within the competence of the Directors to decide upon. Itclearly follows from this that the section is intended to cover acase where the Directors decide to increase the capital by issuingfurther shares within the authorised limit, for it is only within that H

H

limit that the Directors can decide to issue further shares, unlessthey are precluded from doing even that by the regulations of thecompany.It is said that Section 105-C becomes applicable afterthe company in a general meeting has decided upon altering itsmemorandum by increasing its share capital by issuing new shares.If the company at a general meeting has decided upon the increaseof its share capital by the issue of new shares, then it is whollyinappropriate to talk of the Directors deciding to increase capital,because the increase has already been decided upon by thecompany itself. Further, after the company has at a generalmeeting decided to increase its share capital by the issue of newshares, the increased capital becomes its authorised capital andthen if the Directors under Section 105-C decide to increase thecapital by the issue of further shares, then this decision is nothingmore than a decision to raise capital within the newly authorisedlimit. Finally, if Section 105-C were to be held applicable to thecase of an increase of capital above the authorised limit then suchconstruction will lead to anomalous results so far as the companieswhich have adopted Table A, for the section is not consonant withRegulation 42 of Table A which, as will be shown hereafter, appliesto increase of capital beyond the authorised limit. If the legislatureintended that Section 105-C should apply to all companies in thematter of increase of capital above the authorised limit, then thesimplest thing would have been to make Regulation 42 a compulsoryRegulation, instead of introducing a section which in its termsdiffers from Regulation 42 and which therefore makes the positionof companies which have adopted Table A anomalous. It appearsto me, therefore, for reasons stated above, that Section 105-Cbecomes applicable only when the Directors decide to increasecapital within the authorised limit by the issue of further shares.In this view of the matter that section is clearly applicable to thefacts of this case.”

63. Section 81 of the Companies Act, 1956 provided for furtherissue of capital. Section 81(1) read as follows:

“81. Further issue of capital.

AB

C

D

EF

G

H

SUPREME COURT REPORTS

A(1) Where at any time after the expiry of two years from theformation of a company or at any time after the expiry of oneyear from the allotment of shares in that company made for thefirst time after its formation, whichever is earlier, it is proposed toincrease the subscribed capital of the company by allotment offurther shares, then,B

(a) such further] shares shall be offered to the persons who, atthe date of the offer, are holders of the equity shares of thecompany, in proportion, as nearly as circumstances admit, to thecapital paid up on those shares at that date; C

(b) the offer aforesaid shall be made by notice specifying thenumber of shares offered and limiting a time not being less thanfifteen days from the date of the offer within which the offer, ifnot accepted, will be deemed to have been declined; (c) unlessthe articles of the company otherwise provide, the offer aforesaidDshall be deemed to include a right exercis- able by the personconcerned to renounce the shares offered to him or any of themin 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,Eor on receipt of earlier intimation from the person to whom suchnotice is given that he declines to accept the shares offered, theBoard of directors may dispose of them in such manner as theythink most beneficial to the company.

Explanation.- In this sub- section,” equity share capital” and equityFshares” have the same meaning as in section 85.”

(Emphasis Supplied)

64. Section 81(1A) permitted offering of shares to any otherpersons, if certain conditions were met. Section 81(2) read as follows:

G“81(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 renunciationHfor a second time, on the ground that the person in whose favour the renunciation was first made has declined to take the sharescomprised in the renunciation.

65. Section 81(3)(a) provided that nothing in Section 81 will applyto a private company. There are other parts of Section 81, which neednot detain us. We have already noticed the principles laid down inDale& Carrington Invt. (P) Ltd. and another (supra) as per which thoughSection 81(3) made the provision inapplicable to private companies, thehigher stand applied to private companies.

66. A perusal of Section 81(1) indicates that it dealt with a proposalto increase ‘the subscribed capital’ of the company by allotment of‘further shares’. Section 105-C of the Companies Act, 1913, which wehave noticed, used the words ‘where the Directors decide to increasethe ‘capital’ of the company by issue of ‘further shares’. In Section 81of the Companies Act, 1956, the words used are ‘it is proposed to increasethe subscribed capital of the company by allotment of further shares’.

67. The Authorised Capital of a company, which is also known asnominal capital of the company, represents the maximum number ofshares that can be issued. It must be indicated in the Memorandum ofAssociation. It can be increased only by the company by passing aresolution in a General Body Meeting. In this regard, we may noticeRegulation 44 of Table A of Schedule I of the Companies Act, 1956,which read as follows:

“44. The company may, from time to time, by ordinary resolution,increase the share capital by such sum, to be divided into sharesof such amount, as may be specified in the resolution.”

68. In other words, the Authorised Capital cannot be increased bythe Board of Directors. It is out of the Authorised Capital that a companyissues shares. It then becomes the Issued Capital. Whatever is issued,need not be subscribed to. Whatever is subscribed to, would become theSubscribed Capital. Paid-up Capital is defined in Section 2(32) of theCompanies Act, 1956 as including capital credited as paid-up. TheSubscribed Capital may be wholly or partly paid-up.

69. We proceed on the basis that an increase in the AuthorisedCapital does not fall within the powers of the Board, as contemplated inSection 291 of the Act. In Nanalal Zaver(supra), this Court was A

B

C

D

E

F

G

H

Aessentially dealing with the question, as to whether the obligation to offerthe shares upon there being a further issue of shares, must be made inconformity with Section 105-C of the earlier Act, which, as we havenoticed is essentially the regime continued under Section 81 of the 1956Act. It is in the said context that the Court held that the Directors couldat their own initiative only increase the shares from out of the existingBAuthorised Capital, but the increase in Authorised Capital could be doneonly by the company in a meeting of its shareholders. It has been furtherheld that once the Authorised Capital is increased, the Board of Directorswould be bound to act under Section 105-C of the Act.

C70. In fact, in the said case, the Court found that the expression‘capital of a company’ was an ambiguous phrase and may mean eitherIssued Capital or Authorised Capital, according to the context (See theJudgment of Justice M.C. Mahajan in paragraph-18). In the Judgmentof Justice S.R. Das, which we have adverted to, also we find that theview taken is, that the Legislature did not think it safe to leave anDuncontrolled discretion to the Directors, when an increase of capitalwas done by the Directors within the Authorised Capital.

71. The position under the Companies Act, 1956, under Section81, remained the same in that it is only the company, in its General BodyMeeting, which could increase the Authorised Capital. The position stillEcontinued that call it increase in Subscribed Capital, it must be within thelimits of the Authorised Capital.

72. By the Resolution dated 18.12.2009, the Board of Directorshad not actually purported to increase the Authorised Capital. Thecontents of the last paragraph of the Resolution, makes it abundantlyFclear that the Board of Directors was aware that the power lay with theGeneral Body of shareholders to bring about an increase in the AuthorisedCapital. It has, no doubt, undertaken to resolve to issue further capital,even though it could be said that as on 18.12.2009, there was ‘no furthercapital’ subsisting in terms of the limit of Rs.1 crore, which constitutedGthe Authorised Capital as on 18.12.2009. The Resolution to allot theshares in 1:1 ratio and the indication that shares, which are not appliedfor, could be the subject matter of allotment to other shareholders, wereall to become operative upon the applications being considered. TheMinutes further reveal that the consideration of the application was toawait the increase in the Authorised Capital in a duly constituted meetingH

of the General Body of shareholders. It is, no doubt, true that the properway of doing it could have been to pass a Resolution after the shareholdersresolved to increase the Authorised Capital. It is equally true that such aResolution was passed on 27.01.2010. The question is, as to whetherthe act of the Board of Directors attracted the opprobrium of it being anact of oppression. We would think that the decisions of the Board ofDirectors on 18.12.2009, understood as a whole, only means that theResolution to issue further capital was to become effective only afterthe Authorised Capital was duly increased. This is not a case where theBoard of Directors had resolved to allot the shares otherwise disregardingthe mandate of Section 81 of the Act. What is more shares have beenoffered on a ratio of 1:1 to the existing shareholders. They were giventhe choice of refusal or to apply for more or lesser number of shares.This is not a case where the Resolution was to allot the further shares tothe Directors or Members of their Group alone. There is a concurrentfinding that the decision to go in for increase in capital, viz., AuthorisedCapital, was not vulnerable to attack. The decision was based on theadvice given by the Bank. The purpose of the Board of Directors toincrease the capital has been admittedly found to be bonafide. Anincidental gain, namely the change in the shareholding pattern is entirelythe inevitable result of the refusal of the respondent’s groups to apply.We cannot proceed on the basis that the appellants foresaw anddeliberately planned the whole affair. If only the respondents had applied,the situation would not have happened.

73. As far as the aspect that, the purported object was shown asgenerating fresh funds but in place of Rs.90 lakhs only Rs.21 lakhs wasbrought in goes, the fact that the paid-up capital was apparently shownas credited by cancelling loans due by the company to the appellantsgroup, should not prevent this Court from overlooking the fact that thedebt-equity ratio has undoubtedly been improved.It must be borne inmind that the whole idea was to get funds from the Bank for the expansionof the company. The case of the respondents that there were loans dueto them also may not advance their case. It would have been different ifthe respondents had applied and sought adjustment of the considerationby cancelling loans given by them to the company and it was rejected.

On the whole, in the facts, the appellants cannot be described ashaving acted in a defective or in an unfair manner, in the matter ofallotment of further shares particularly when the contention of the AB

C

D

E

F

G

H

[2023] 8 S.C.R.

Arespondents about the bonafides of the decision to increase theauthorised capital has been found in favour of the appellants. The appealsare partly allowed. The direction to allot shares in the impugned order isset aside. The order for conducting audit will remain undisturbed. Therewill be no order as to costs.

B

Ankit Gyan

Appeals partly allowed.

(Assisted by : Roopanshi Virang, LCRA)

C

D

E

F

G

H