Companies Act - Decision To Allot Additional Shares Cannot Be Set Aside Merely Because Promoters Have Also Benefited: Supreme Court

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 characterised 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.Facts of the Case:The respondent-company, Ambika Food Products Pvt Ltd, is a closely held private limited company which is controlled by three groups of shareholders, who all hold varying percentage of shares in the said company.The H.M. Patel Group, the Sheth Group, and the V.P. Patel Group held 30.80, 45, and 24.20 percentage of the paid-up share capital in the company, respectively.Consequently, the authorised capital of the company was increased from Rs 1 Crore to 2 Crore. After the issue of additional shares, the H.M. Patel Group’s shareholding increased to 63.58% of the paid-up share capital. The shareholding of the V.P. Patel Group and the Sheth Group stood at 12.74% and 23.68% percentage, respectively, of the paid-up share capital.The V.P. Patel Group and the Sheth Group filed petitions under Sections 397 and 398 of the Companies Act, 1956 before the National Company Law Tribunal (NCLT), alleging mismanagement and oppression by the H.M. Patel Group, and challenged the latter’s decision to increase the authorised share capital of the company.The NCLT upheld the increase in the authorised share capital of the company, holding that the same was valid and binding on all the shareholders. The Tribunal, however, found that the distribution of the shares was ‘defective’. Thus, it directed that the allotment of shares in respect of the increased share capital, was to be made to all the existing shareholders of the company, in proportion to their shareholding. The same was upheld by the NCLAT in appeal. Against this, the H.M. Patel Group (the appellants) filed an appeal before the Supreme Court.The H.M. Patel Group argued before the top court that all the shareholders were given an equal opportunity to apply for the additional shares in proportion to their existing shareholdings; further, they could also apply for a lesser or a greater number of shares. The H.M. Patel Group pointed out that the Sheth group and the V.P. Patel Group did not apply for the same. It pleaded that since the increase in the capital was not found to be illegal or malafide by the NCLT and the NCLAT, the actual allotment of shares could not be held to be defective.Analysis of the Supreme Court:Referring to the facts of the case, the Supreme Court observed that in response to a proposal for a term-loan made by the appellant-group in 2009, the Bank of Baroda advised the...

Companies Act - Decision To Allot Additional Shares Cannot Be Set Aside Merely Because Promoters Have Also Benefited: Supreme Court

Parina Katyal

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