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IN THE HIGH COURT OF GUJARAT
C.K. Thakkar, R. Balia, JJ.
In re Mafatlal Industries Ltd – Petitioner
Cross-objections in O.J. Appeal No. 16 of 1994 in Company Petition No. 22 of 1994
Decided On : 12-07-1996
The allotment of shares to NOCIL and Shushrupad Investment Limited out of the rights issue of 1987 was contrary to and in breach of the prohibitory order of injunction issued by the City Civil Court, Ahmedabad, in Suits Nos. 3181 and 3182 of 1987, and NOCIL and Shushrupad could not have legitimately participated in respect of those shares at the meeting of the shareholders in pursuance of the directions issued by this court on an application having been made under Section 391(1) of the Companies Act though the court ultimately found that even after excluding participation in respect of such unauthorisedly issued shares, the proposed scheme of amalgamation had got the approval of the requisite majority under Section 391(2).
Fact of the Case:
The company had proposed to increase its subscribed capital in the year 1987. The proposed increase was governed under Section 81(1) of the Act, that is to say, it was the rights issue which was required to be offered to persons who on the date of offer were shareholders of the company and offer was made in proportion as nearly as circumstances admitted to the capital paid up on those shares on that date. Two civil suits were filed in the City Civil Court at Ahmedabad, which were numbered as 3181 of 1987 and 3182 of 1987, by two different shareholders. Before allotment had taken place, the City Civil Court had issued injunction on September 4, 1987, in the following terms: "The defendants are permitted to allot shares to the applicants in the rights issue subject to the clear stipulation operating that allotment of shares would be subject to the result of this litigation. They are also directed not to allot shares from the unsubscribed portion thereof to anyone except banks and/or public financial institutions without previous permission from this court."
Finding of the Court:
The allotment of shares to NOCIL and Shushrupad Investment Limited out of the rights issue of 1987 was contrary to and in breach of the prohibitory order of injunction issued by the City Civil Court, Ahmedabad, in Suits Nos. 3181 and 3182 of 1987, and NOCIL and Shushrupad could not have legitimately participated in respect of those shares at the meeting of the shareholders in pursuance of the directions issued by this court on an application having been made under Section 391(1) of the Companies Act though the court ultimately found that even after excluding participation in respect of such unauthorisedly issued shares, the proposed scheme of amalgamation had got the approval of the requisite majority under Section 391(2).
Issues: Whether the allotment of shares to NOCIL and Shushrupad Investment Limited out of the rights issue of 1987 was contrary to and in breach of the prohibitory order of injunction issued by the City Civil Court, Ahmedabad, in Suits Nos. 3181 and 3182 of 1987, and NOCIL and Shushrupad could not have legitimately participated in respect of those shares at the meeting of the shareholders in pursuance of the directions issued by this court on an application having been made under Section 391(1) of the Companies Act though the court ultimately found that even after excluding participation in respect of such unauthorisedly issued shares, the proposed scheme of amalgamation had got the approval of the requisite majority under Section 391(2).
Ratio Decidendi: The court held that the allotment of shares to NOCIL and Shushrupad Investment Limited out of the rights issue of 1987 was contrary to and in breach of the prohibitory order of injunction issued by the City Civil Court, Ahmedabad, in Suits Nos. 3181 and 3182 of 1987, and NOCIL and Shushrupad could not have legitimately participated in respect of those shares at the meeting of the shareholders in pursuance of the directions issued by this court on an application having been made under Section 391(1) of the Companies Act though the court ultimately found that even after excluding participation in respect of such unauthorisedly issued shares, the proposed scheme of amalgamation had got the approval of the requisite majority under Section 391(2). The court reasoned that the injunction order was binding on the company and that the company was not competent to make an offer for allotment to a third party or to accept the offer made by a third party to bring into existence a valid and binding contract of allotment of shares in favour of the third party.
Final Decision: The cross-objection fails and is hereby dismissed.
JUDGMENT :
R. Balia, J.
1. The company has preferred cross-objections against the finding recorded by the learned single judge [see [1995] 84 Comp Cas 230] that the allotment of shares to NOCIL and Shushrupad Investment Limited out of the rights issue of 1987 was contrary to and in breach of the prohibitory order of injunction issued by the City Civil Court, Ahmedabad, in Suits Nos. 3181 and 3182 of 1987, and NOCIL and Shushrupad could not have legitimately participated in respect of those shares at the meeting of the shareholders in pursuance of the directions issued by this court on an application having been made under Section 391(1) of the Companies Act though the court ultimately found that even after excluding participation in respect of such unauthorisedly issued shares, the proposed scheme of amalgamation had got the approval of the requisite majority under Section 391(2).
2. Controversy had arisen in the wake of objections raised by the objector-appellant that the company had proposed to increase its subscribed capital in the year 1987. The proposed increase was governed under Section 81(1) of the Act, that is to say, it was the rights issue which was required to be offered to persons who on the date of offer were shareholders of the company and offer was made in proportion as nearly as circumstances admitted to the capital paid up on those shares on that date. Two civil suits were filed in the City Civil Court at Ahmedabad, which were numbered as 3181 of 1987 and 3182 of 1987, by two different shareholders. Before allotment had taken place, the City Civil Court had issued injunction on September 4, 1987, in the following terms :
"The defendants are permitted to allot shares to the applicants in the rights issue subject to the clear stipulation operating that allotment of shares would be subject to the result of this litigation. They are also directed not to allot shares from the unsubscribed portion thereof to anyone except banks and/or public financial institutions without previous permission from this court."
3. In view of the operation of the aforesaid order and keeping in view the provisions of Section 81 of the Act, it had been contended by the objector that NOCIL was not a shareholder of MIL on the relevant date and, therefore, was not entitled to make any offer of rights issue. Another company, Shushrupad, was the holder of only 563 shares of MIL and was entitled to allotment of only 563 additional shares pursuant to the rights issue and not anything more than that. In the wake of this position, it was contended that allotment of any share to NOCIL and allotment of shares exceeding 563 shares to Shushrupad were contrary to the injunction order operating against the company and, therefore, illegal and, on the strength of such allotment or to the extent of such illegal allotment, the two companies could not have participated in the meeting.
4. It was the case of the company that NOCIL had applied for allotment of 1,50,000 shares on July 2, 1987, for participating in MIL's equity shares and Shushrupad had already been a shareholder, and was eligible to apply for additional shares more than to which it was entitled. Both were subscribers to the equity issue of 1987 and there was no violation of the order of the court. It was also contended that even if the allotment has been made in violation of the injunction order of the court by the company, it does not affect the validity of the allotment and, therefore, such allottees cannot be excluded from participation in the meeting of the shareholders, though punishment for disobedience of the injunction order may be imposed on the company or its officers responsible for the breach. Lastly, it was contended that even if such shares are held to be illegally allotted to the above-referred to two companies to the extent stated, and they are excluded from the shareholding, the scheme had been approved by the requisite majority.
5. The learned single judge did not accept the first t
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