Companies Act – Decision To Allot Additional Shares Cannot

The Supreme Court has upheld the largely disproportionate allotment of rights share in favour of one group of shareholders of a private limited company, substantially increasing its shareholding percentage in the company over other group of shareholders.
The bench comprising
Justices K.M. Joseph and B.V. Nagarathna
found that the increase in the appellant- H.M. Patel Group’s shareholding from 30.80% to 63.58% of the paid-up share capital of the private company, was the result of the other shareholder-group’s refusal to apply for the additional shares, despite being given the opportunity. Thus, the allotment of fresh shares could not be characterized as oppressive, the court ruled.

The court held that after the Board of Directors had resolved to allot additional shares to the existing shareholders in the ratio of 1:1, while also giving them the option to apply for more or lesser number of shares than they were entitled to, the members of the H.M. Patel Group had applied for a greater number of shares. The shareholders constituting the other shareholders’ group, however, did not apply for the same.

The court thus ruled that there was no defect in the allotment of additional shares after the authorized share capital of the company was increased by a resolution passed in the Extraordinary General Meeting of the shareholders. The top court thus set aside the order of the National Company Law Appellate Tribunal (NCLAT) where it had ruled that the distribution of the additional shares was ‘defective’. The Tribunal had directed the allotment of additional shares to all the existing shareholders of the company in proportion to their shareholding.

The Apex Court noted that the members of the H.M. Patel Group were members of the Board of Directors at the time the decision to increase the authorized share capital and issue fresh shares was taken. It held that though Section 81(3) of Companies Act, 1956 expressly exempts a private limited company from the purview of Section 81, which deals with further issue of capital; however, notwithstanding the same, the conduct of the Directors is to be judged on a higher yardstick.

The court, however, remarked that the fact that the Directors may also benefit from a decision taken primarily with the intention to promote the interest of the Company, cannot vitiate the decision. Thus, even though the Directors who constituted the said shareholders’ group, benefited and made a gain from the implementation of a decision taken primarily with a view to safeguard the interest of the Company, it cannot by itself render the decision vulnerable to attack.
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