Companies Act, 1956 – s. 2(32), 81, 81(1A), 81(3), 397, 398 – Companies Act, 1913 – s. 105-C – First respondent is a private limited company having authorised capital of Rs.1 crore – There are three groups i.e. HMP, S and VPP – Appellant nos. 1 and 2 described as the ‘HMP’ Group had 30.80% of the paid up share capital – ‘S’ Group represented by respondent nos. 4 & 5 had 45 per cent share and ‘VPP’ Group represented by respondent nos. 2 & 3 had 24.20 percentage in the paid-up capital – In response to the proposal for a term-loan made by the appellants, Bank advised them to increase Share Capital for minimum level of Rs. 2 Crore – First respondent company send a Notice to its Directors, four in number, viz., the appellants and Respondents 2 & 3 – Meeting was convened on 18.12.2009 – Directors of ‘S’ group resigned earlier and directors of ‘VPP’ Group were granted leave of absence – In the said meeting, the company proposed to issue further shares to its existing members in the ratio of 1:1 – S and VPP group sought to treat 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 was increased to 2 crores – VPP Group and the S Group, purported to project a case of mismanagement and oppression by the appellants in the petitions u/s. 397 and 398 of the Companies Act, 1956 – NCLT found that the increase in the share capital and the allotment of shares itself, was not an act of oppression of the rights – NCLAT found that the allotment in the ratio of 1:1 was not oppressive – However, the manner in which allotment is done, may be illegal and, thus, oppressive – The act of increase in the share capital was upheld – The distribution of shares was ‘defective’ – On appeal, held: The authorised capital of a company, which is also known as nominal capital of the company, represents the maximum number of shares that can be issued – It must be indicated in the Memorandum of Association – It can be increased only by the company by passing a resolution in a General Body Meeting – By the Resolution dated 18.12.2009, the Board of Directors had not actually purported to increase the Authorised Capital – The contents of the last paragraph of the Resolution, makes it abundantly clear that the Board of Directors was aware that the power lay with the General Body of shareholders 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 ‘no further capital’ subsisting in terms of the limit of Rs. 1 crore, which constituted the Authorised Capital as on 18.12.2009 – What is more shares have been offered on a ratio of 1:1 to the existing shareholders – They were given the 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 to the Directors or Members of their Group alone – There is a concurrent finding that the decision to go in for increase in capital, viz., Authorised Capital, was not vulnerable to attack – The decision was based on the advice given by the Bank – The purpose of the Board of Directors to increase the capital has been admittedly found to be bona fide – An incidental gain, namely the change in the shareholding pattern is entirely the inevitable result of the refusal of the respondent’s groups to apply – On the whole, in the facts, the appellants cannot be described as having acted in a defective or in an unfair manner, in the matter of allotment of further shares particularly when the contention of the respondents about the bona fides of the decision to increase the authorised capital has been found in favour of the appellants.
Partly allowing the appeals, the Court
HELD: 1.1 The Authorised Capital of a company, which is also known as nominal capital of the company, represents the maximum number of shares that can be issued. It must be indicated in the Memorandum of Association. It can be increased only by the company by passing a resolution in a General Body Meeting. In other words, the Authorised Capital cannot be increased by the Board of Directors. It is out of the Authorised Capital that a company issues shares. It then becomes the Issued Capital. Whatever is issued, need not be subscribed to. Whatever is subscribed to, would become the Subscribed Capital. Paid-up Capital is defined in Section 2(32) of the Companies Act, 1956 as including capital credited as paid-up. The Subscribed Capital may be wholly or partly paid-up. [Paras 67, 68][279-D-G]
1.2 The position under the Companies Act, 1956, under Section 81, remained the same in that it is only the company, in its General Body Meeting, which could increase the Authorised Capital. The position still continued that call it increase in Subscribed Capital, it must be within the limits of the Authorised Capital. By the Resolution dated 18.12.2009, the Board of Directors had not actually purported to increase the Authorised Capital. The contents of the last paragraph of the Resolution, makes it abundantly clear that the Board of Directors was aware that the power lay with the General Body of shareholders 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 ‘no further capital’ subsisting in terms of the limit of Rs.1 crore, which constituted the Authorised Capital as on 18.12.2009. The Resolution to allot the shares in 1:1 ratio and the indication that shares, which are not applied for, could be the subject matter of allotment to other shareholders, were all to become operative upon the applications being considered. The Minutes further reveal that the consideration of the application was to await the increase in the Authorised Capital in a duly constituted meeting of the General Body of shareholders. It is, no doubt, true that the proper way of doing it could have been to pass a Resolution after the shareholders resolved to increase the Authorised Capital. It is equally true that such a Resolution was passed on 27.01.2010. The question is, as to whether the act of the Board of Directors attracted the opprobrium of it being an act of oppression. We would think that the decisions of the Board of Directors on 18.12.2009, understood as a whole, only means that the Resolution to issue further capital was to become effective only after the Authorised Capital was duly increased. This is not a case where the Board of Directors had resolved to allot the shares otherwise disregarding the mandate of Section 81 of the Act. What is more shares have been offered on a ratio of 1:1 to the existing shareholders. They were given the 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 to the Directors or Members of their Group alone. There is a concurrent finding that the decision to go in for increase in capital, viz., Authorised Capital, was not vulnerable to attack. The decision was based on the advice given by the Bank. The purpose of the Board of Directors to increase the capital has been admittedly found to be bona fide. An incidental gain, namely the change in the shareholding pattern is entirely the inevitable result of the refusal of the respondent’s groups to apply. This Court cannot proceed on the basis that the appellants foresaw and deliberately planned the whole affair. If only the respondents had applied, the situation would not have happened. [Paras 71, 72][280-E-H; 281-A-E]
1.3 As far as the aspect that, the purported object was shown as generating fresh funds but in place of Rs.90 lakhs only Rs.21 lakhs was brought in goes, the fact that the paid-up capital was apparently shown as credited by cancelling loans due by the company to the appellants group, should not prevent this Court from overlooking the fact that the debt-equity ratio has undoubtedly been improved. It must be borne in mind that the whole idea was to get funds from the Bank for the expansion of the company. The case of the respondents that there were loans due to them also may not advance their case. It would have been different if the respondents had applied and sought adjustment of the consideration by cancelling loans given by them to the company and it was rejected. On the whole, in the facts, the appellants cannot be described as having acted in a defective or in an unfair manner, in the matter of allotment of further shares particularly when the contention of the respondents about the bona fides of the decision to increase the authorised capital has been found in favour of the appellants. The appeals are partly allowed. The direction to allot shares in the impugned order is set 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 Assurance Company Limited and another AIR 1950 SC 172 :
[1950] SCR 391 – followed.
Dale & Carrington Invt. (P) Ltd. And another v. P.K. Prathapan and others (2005) 1 SCC 212 : [2004] 4 Suppl. SCR 334 – distinguished.
Needle Industries (India) Ltd. and others v. Needle Industries Newey (India) Holding Ltd. And others (1981)
3 SCC 333 : [1981] 3 SCR 698 – referred to
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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