NCLT Orders Share Allotment or Refund with Interest for Mismanaged Share Application Money Under Companies Act, 2013

NCLT Directs Company to Allot Shares or Refund Investment in Shareholder Dispute

Indore, India – In a recent order by the National Company Law Tribunal (NCLT), Court No. 1, a dispute between Rajesh Agrawal and Makhija Construction & Engineering Pvt Ltd has been partially resolved, with the tribunal directing the company to either allot equity shares to the applicants or refund their share application money with interest. The order, delivered on February 3rd, 2025, by a bench comprising Hon’ble Member (Judicial) Chitra Ram Hankare and Hon’ble Member (Technical) Kaushalendra Kumar Singh, addresses allegations of oppression and mismanagement within the company.

Background of the Case

The case, CP/9(MP)2021, was filed by Rajesh Agrawal and others (the Petitioners) against Makhija Construction & Engineering Pvt Ltd and its directors (the Respondents) under Sections 241-242 of the Companies Act, 2013. The Petitioners, claiming to be shareholders, alleged that the Respondents engaged in acts of oppression and mismanagement, primarily concerning their share application money.

The Petitioners contended that they had invested ₹37,75,450 as share application money between 2007 and 2014 with the understanding that they would be allotted a majority stake (approximately 61.34%) in Makhija Construction & Engineering Pvt Ltd. They argued that despite this investment, the Respondents only allotted them a nominal 50 shares and fraudulently converted the substantial share application money into an unsecured loan in the financial year 2013-14 balance sheets, without their knowledge or consent. This conversion, they claimed, deprived them of their shareholder rights.

The Respondents, on the other hand, contested the Petitioners' claims, arguing that they did not meet the minimum shareholding requirement to file the petition under Section 241-242 of the Companies Act, 2013. They further justified the conversion of share application money into an unsecured loan, citing the provisions of the Companies Act, 2013, which stipulate a 60-day limit for share allotment from the receipt of application money. They argued that the conversion was a necessary legal compliance due to this time limit.

Interestingly, Respondent Nos. 3 and 4 partially supported the Petitioners, admitting that the investment was intended as share application money for equity shares and expressing unawareness of the loan conversion. They even alleged manipulation and forgery if board resolutions for such conversion were presented.

Tribunal's Observations and Decision

The NCLT bench carefully considered the submissions and evidence presented. The tribunal highlighted that while the Respondents claimed the conversion was due to the 60-day rule in the Companies Act, 2013 [Section 42(6)], they failed to either allot the shares within 60 days or refund the application money within 15 days as mandated by the same section. The tribunal noted:

> "However, we note that the Respondent No. 3 & 4 supports the averments raised by the petitioners that they were approached by the respondent to invest in the company for the purpose of liasoning with IDA for getting approvals, allotment and possession etc of the educational plot of IDA and the amount invested by the petitioners were termed as share application money against which equity shares of the respondent No.1 company was to be allotted to the petitioners in proportion to their investment."

and

> "We further note that though the conversion of share application money into unsecured loan was shown in the audited financial statement for the financial year 2013-14, however, the same were filed in the year 2017 and the same is not denied by the respondent. Thus the limitation period is to be reckoned from 2017 and the present application is filed in the year 2021. ... Thus the contention of the respondent that the present application is barred by limitation is misplaced."

Ultimately, the NCLT concluded that the company failed to comply with the provisions of Section 42(6) of the Companies Act, 2013. Consequently, the tribunal directed Makhija Construction & Engineering Pvt Ltd to:

1. Refund the entire share application money of ₹37,75,450, now reflected as an unsecured loan, within one month from the order date, along with interest at 12% per annum from June 1st, 2014.
2. In the event of failure to refund within the stipulated time, the company is directed to allot equity shares to the Petitioners based on their share application money within a month thereafter.

Furthermore, the Registrar of Companies (ROC), Gwalior, was directed to investigate the compliances made by the respondent company and take necessary penal actions for any breaches of the Companies Act, 2013.

Implications of the Order

This order underscores the importance of adhering to the timelines stipulated under the Companies Act, 2013, regarding share allotment against application money. It also highlights the NCLT's willingness to intervene in cases of mismanagement and ensure that shareholder investments are protected, either through share allotment or timely refunds with appropriate interest. The case serves as a reminder for companies to maintain transparency and compliance in handling share application money and shareholder rights.

The petition was partly allowed and disposed of, offering a significant relief to the Petitioners while holding Makhija Construction & Engineering Pvt Ltd accountable for its handling of share application money.