TMI Blog1994 (10) TMI 317X X X X Extracts X X X X X X X X Extracts X X X X ..... ares and one share was held by Shri S. M. Kannappa who was the proprietor before the sole proprietorship was converted into a company. The one share held by Shri Kannappa was transferred to the first petitioner by the legal heirs of Shri Kannappa after his death in 1990. As the company refused to register the share in the name of petitioner No. 1, a petition under Section 155 of the Act was filed by the petitioner in the Karnataka High Court which is still pending. From the reply filed in these proceedings by the respondents, the petitioners came to know that the company had issued further 6,000 shares in the company at 3,000 shares each to respondents Nos. 6 and 7. In the present petition before us, this issue has been challenged and the petitioners have sought for removal of the names of these respondents from the register of members in respect of these 6,000 shares alleging that this allotment was made only with a view to increase the shareholding of respondents Nos. 6 and 7 so as to upset the equal holding of both the groups. 3. It is further stated in the petition that even though respondents Nos. 6 and 7 are not directors in the board yet respondents Nos. 2 to 5 who are di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntained. Accordingly, they have sought for dismissal of the petition as mala fide and frivolous. 5. We heard the case on a number of days and finally on June 24, 1994. Shri A. K. Mylsamy, advocate, appeared for the petitioners and Shri S. Sreenivasan, practising company secretary for respondents Nos. 1 to 5 and Shri C. Harikrishnan, advocate, for respondents Nos. 6 and 7. Learned counsel for the petitioner reiterating the submissions made in the petition stated that the preliminary objection relating to maintainability of the petition no longer survives in view of the decision of the Company Law Board in Jitendra Nath Saha v. Shyamal Mondal [1993] 1 CLJ 76 ; [1995] 82 Comp Cas 688 in which the Board has held that the provisions of Section 111 are applicable to private limited companies. He further submitted that the shareholding of the petitioners and the respondents' group was always equal, each holding 1,000 shares. Even though originally 500 shares each were held by Shri Om Parkash Narang, Shri M.L. Manchanda, Shri Vijay Kumar Narang (second petitioner) and Shri Bhupinder Rai (first petitioner), there were inter se transfers in the family and presently the petitioners' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on September 24, 1990, to indicate the purpose for which the allotment was made. According to him, in earlier allotments made by the company on June 15, 1981, and August 17, 1981, while converting the loan into share capital, the shareholding parity was maintained. He further alleged that the company has not produced any evidence regarding the payment received towards these shares and as such an adverse inference should be drawn against the company. For this proposition he relied on Gopal Krishnaji Ketkar v. Mohamed Haji Latif, AIR 1968 SC 1413. He summed up his argument stating that the allotment is irregular, illegal and mala fide done only with a view to reduce the position of the petitioner to a minority and as such the prayer for rectification of register of members in respect of these shares be granted. 6. Shri S. Sreenivasan, appearing on behalf of respondents Nos. 1 to 5, questioned the claim of the petitioners that there were identifiable groups in the company and the shareholding parity is to be maintained. There is neither any written agreement between the shareholders nor any terms to that effect incorporated in the articles of association of the company. No shareh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... share of Shri Kannappa. He also drew our attention to the extracts of the ledger produced by the company from which it was evident that the amount standing to the credit of respondents Nos. 6 and 7 was set off by issue of the impugned shares to respondents Nos. 6 and 7. He was of the view that the provisions of Section 111 do hot apply to allotment of shares but it relates only to cases of transfer of shares. However, he stated that in view of the Company Law Board decision in Jitendra Nath Saha v. Shyamal Mondal [1395] 1 CLJ 76 ; [1995] 82 Comp Cas 688 that even allotment in a private limited company could be agitated in a petition under Section 111(4), the, attack on allotment is possible only in two contingencies. One is that the allotment is illegal and the other is that the allotment is mala fide. The former relates to procedural defect or lack of authority while the latter relates to state of mind. Only cases relating to the first category can be entertained in a proceeding under Section 111(4) and the latter only in proceedings under Section 397/398. The company has established, he argued, that there was neither any procedural defect nor did the board of directors lack auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired their shares by transfer from their fathers, Shri M. L. Manchanda and Shri O. P. Narang, respectively. In other words, out of the five original promoters among whom the agreement of maintaining parity is alleged to have been agreed upon, only petitioners Nos. 1 and 2 are in a position to assert now on such agreement. There is nothing in the articles incorporating any such terms or any written document produced before us in this regard. Their idea of maintaining parity also falls when we look at the attempt of the petitioner to acquire one share of Shri Kannappa, the acquisition of which would definitely affect the so called parity. Another important point raised by counsel for respondents Nos. 6 and 7, Shri Harikrishnan, which impressed us was the relationship among the parties and how in such a situation any group concept would have been visualised at the time of incorporation of the company. 11. The relationship between the parties is that the first petitioner is the brother-in-law of the seventh respondent and the third petitioner is the uncle of the seventh respondent and petitioner No. 2 is the son of the third petitioner. The sixth respondent is the son of one of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 1 : 1 itself is an admission on the part of the company that the shareholding parity is to be maintained. We are of the view, that, such rights offer itself cannot be so construed, in the absence of any other material, specially when the same is not incorporated in the articles of association, to establish the alleged agreement between the promoters. 13. Now, that we have held that there is no agreement regarding maintenance of parity in the shareholding, which is binding upon the company, the issue that arises is whether the board of directors has infringed the provisions of the articles of association of the company in allotment of the impugned shares in favour of respondents Nos. 6 and 7. Articles 6 and 7 are relevant in regard to further issue of shares. According to article 6 The shares of the company shall be under the control of directors who may issue and allot them at such time or times in such manner in all respects as the directors may think fit . Article 7 reads the company may, by a special resolution, passed in a general meeting increase the capital of the company .by issue of new shares or such other amounts and value and under such conditions as may be spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16. The next argument advanced by the petitioner was that issue of the impugned shares was with the mala fide intention of reducing the petitioners' shareholding to the advantage of the respondents. In this regard, we are in full agreement with the submission of Shri Harikrishnan that matters relating to allotment of shares can be agitated in a petition under Section 111(4) only when it is either in violation of the provisions of articles or where the board of directors have exceeded their authority as then only the entry of a name in the register of members would be wrong and would merit rectification. Therefore, in a petition under Section 111 the scope of which is limited, the question of mala fides and bona fides of any allotment cannot be either agitated or enquired into. If the petitioners are aggrieved that the allotment of the impugned shares was for a purpose other than for the benefit of the company, they have to invoke the relevant, provisions of the Companies Act and not Section 111(4) which is limited to rectification, of the register of members wherever the board of directors have entered or removed the name of any one without any sufficient cause. 17. This dec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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