2016 Supreme(SC) 821

IN THE SUPREME COURT OF INDIA
RANJAN GOGOI, PRAFULLA C. PANT, JJ.
Tin Plate Dealers Association Pvt. Ltd. & Ors. - Appellants
Versus
Satish Chandra Sanwalka & Ors. - Respondents
Civil Appeal Nos. 589 & 599 of 2010
Decided On : 07-10-2016

IMPORTANT POINTS
Notice of Extra Ordinary General Meeting (EOGM) to all members of the Company is mandatory.
Enabling provisions under the Act would require incorporation in the Articles of a company. Utilization of reserves arising from revaluation of assets for the purpose of issuing fully paid bonus shares would be permissible, provided Articles of Association provide for such course of action.
There is no legal impediment on Board of Directors in issuing fresh equity shares. However, fundamental principle of fair play must be adhered to.
Section 10F of the Companies Act, 1956 is not akin to section 100(4) of the Code of Civil Procedure, 1908. Hence non-framing of substantial question of law would not invalidate the order passed by the High Court.

Headnote:(a) Companies Act, 1956 – Section 53 r/w Article 18, Articles of Association – Shares held by Gupta group forfeited – Independent shares allotted to Sanwalka group – No relation between the two – Call money due on shares forfeited from Gupta group – Sanwalka group paying all monies due – Notice dated 5.1.1991 requiring Sanwalka group to pay call-in arrears – Forfeiting their shares for not doing so – No question for Sanwalka group to pay any call-in arrears – Issuance of Notice dated 5.1.1991 not proved – Balance sheet showing call-in arrears does not and cannot operate as an alternative to a call notice, more so when it was prepared after removal of members of Sanwalka group from the Board – Company petition by Sanwalka group, held, maintainable. (Para 15, 17, 18)

       (b) Companies Act, 1956 – Section 172(2) r/w section 41 – Notice of Extra Ordinary General Meeting (EOGM) to all members of the Company mandatory – Sanwalka group a member of the Company on date of EOGM – No notice issued to them – Decisions with regard to bonus shares; issue of 25,000 ordinary equity shares and conversion of preference shares to equity shares made pursuant to decision in EOGM – Not valid. (Para 19)

       (c) Companies Act, 1956 – Section 205(3) – Utilization of reserves arising from revaluation of assets for the purpose of issuing fully paid bonus shares – Permissible, provided Articles of Association provide for such course of action – Enabling provisions under the Act would require incorporation in the Articles of a company – Instantly, Articles of Association not empowering Directors to so act – Issue of bonus shares out of revaluation reserves in absence of any provision in Articles of the Company on the basis that the Act so provides, impermissible. (Para 20)

       (2005) 6 SCC 718; (2005) 11 SCC 73 – Relied upon

       (d) Company law – Bonus shares – Declared purpose being to raise funds badly needed by Company – However, revaluation of existing assets of the company and issuance of bonus shares against such revaluation could not and did not generate any additional funds – Purpose indicated in the resolution of EOGM held to be a sham. (Para 21)

       (e) Company law – Issue of fresh equity shares – No legal impediment on Board of Directors – However, fundamental principle of fair play must be adhered to – Therefore direction of the CLB and the High Court that allotment from the aforesaid 25,000 newly issued ordinary equity shares should be proportionate to the share holding of the two groups – Does not require any interference. (Para 22)

       (1981) 3 SCC 333 – Relied upon

       (f) Companies Act, 1956 – Section 87(2) r/w Articles 20, 21 and 22, Articles of Association of the Company – Except where dividends have not been paid, preference share holders do not have a right to vote except in matters which directly affects the rights attached to the preference shares – The Articles must necessarily have to be understood in the light of Section 87(2) – Neither the period during which dividends had not been paid specified, nor the amount due indicated – Nothing to show that the 3065 equity shares represent a fair value of the dividends claimed to be unpaid – Further, the preference shares in question were held by the Gupta Group who was in control of the company at that point of time – Conversion of the 3065 preference shares into equity shares struck down. (Para 26, 28)

       (g) Companies Act, 1956 – Section 10F – Not akin to section 100(4) of the Code of Civil Procedure, 1908 – Hence non-framing of substantial question of law would not invalidate the order passed by the High Court. (Para 30)

       Facts of the case:

       The appellant is a private limited company incorporated in the year 1948 with its registered office at Calcutta. The appellants 2 to 5 (the ‘Gupta Group’) had come into control of the company by actions and omissions complained of by respondents 1 to 7 which had led to the institution of the company petition under Section 397/398 of the Companies Act, 1956. The said respondents may be conveniently referred to as the “Sanwalka Group”.

       At the time of its incorporation, the authorised capital of the company was Rs. 10 lakh consisting of 4,000 redeemable cumulative preference shares of Rs. 100/-each and 6,000 ordinary shares of Rs. 100/-each. The paid-up capital of the company before the issue of new, ordinary and bonus shares, which is the bone of contention between the parties, consisted of 4132 partly paid ordinary shares and 1868 fully paid ordinary shares besides 3065 fully paid preference shares. One M/s. Gupta Brothers originally held the 4132 partly paid shares. The said shares were forfeited sometime in the year 1966 and thereafter the same were issued to the Sanwalka Group who paid a total of Rs.45 for each share consisting of payment at the time of application and allotment and Rs.10/-per share on a call being made subsequently.

       According to the Sanwalka Group, the Gupta Group without notice to them had increased the authorized capital of the company to Rs. 5 crores in an Extra Ordinary General Meeting of the Company held on 5.7.1994 without notice to them.

       A Board Meeting was held on the same day to give effect to the above decision taken in the E.O.G.M. to increase the share capital of the company. In the said Board meeting, a follow up decision was taken to allot bonus shares at the ratio of 60 bonus shares for every fully paid up preference and equity share held. The said bonus shares were to be issued against revaluation of the industrial plot in Okhla Industrial Area, New Delhi which was the only asset of the company at that time. In any case, no bonus shares were allotted to the Sanwalka Group.

       In August, 1995 the company issued 3065 equity shares to the holders of the preference shares (Gupta Group).

       In February, 1996, 25,000 ordinary equity shares were again issued to the members of the Gupta Group against which Rs.40 per share was paid. This allotment was, however, to the exclusion of the Sanwalka Group. Contending that the aforesaid acts had the effect of reducing the Sanwalka Group, which was otherwise in the majority, to a negligible minority in the company, the company petition alleging oppression was filed before the Company Law Board wherein the act of removing two members of the Sanwalka Group from the Board of Directors (w.e.f.1.7.1991) and inducting two others of the Gupta Group in their place was also called into question.

       The Company Law Board (CLB) overruled the objections raised by the Gupta Group to the maintainability of the petition.

       The CLB further held that the issue of bonus shares against revaluation reserve was contrary to the provisions of Article 96 of Table A of the Act of 1956. So far as the issue of 25,000 ordinary equity shares is concerned, the CLB decided the issue in favour of the Gupta Group. However, as the members of the Sanwalka Group continued to be members of the company, it was held that proportionate allotment of the said equity shares should have been made to them also. The removal of the two representatives of the Sanwalka Group from the Board was also held to be bad on the aforesaid count. Of particular significance would be the finding of the Board that notice of the EOGM held on 5.7.1994 in which decision was taken to raise the share capital of the company was, admittedly, not given to the Sanwalka Group though they were entitled to such notice.

       The Gupta Group moved the High Court by filing an appeal under Section 10F of the Act. Challenging the decision of the Board insofar as the issue of 3065 preference shares and the lease in respect of the industrial plot is concerned, the Sanwalka Group had filed a separate appeal.

       The High Court dismissed both sets of appeal.

       Finding of the Court;

       Impugned judgments do not require interference.

       Result: Civil Appeal No.589 of 2010 filed by the Gupta Group dismissed whereas Civil Appeal No.599 of 2010 filed by the Sanwalka Group disposed of with directions.