Case title:
Hasmukhlal Madhavlal Patel and Anr. Vs. Ambika Food Products Pvt. Ltd. And Ors.
Bench:
Hon’ble Mr. Justice K.M. Joseph & Hon’ble Mrs. Justice B.V. Nagarathna
Parties:
Appellant: Hasmukhlal Madhavlal Patel and Anr.
Respondent: Ambika Food Products Pvt. Ltd. And Ors.
SUBJECT
The NCLT's order was contested by the appellants in Company Appeals before the National Company Law Appellate Tribunal (NCLAT). With the exception of a change relating to the financial year indicated in the order, the NCLAT upheld the most of the instructions. The NCLAT's order is currently being contested by the appellants before the Supreme Court.
IMPORTANT PROVISIONS
The Companies Act, 1913
- Section 105C
- Section 50
The Companies Act, 2013
- Section 421
The Companies Act, 1956
- Section 2A
- Section 397
- Section 398
- Section 81
- Section 85
- Section 2(32)
- Regulation 44 of Table A of Schedule I
BRIEF FACTS
- In this case, A closely held private limited company with ten lakh equity shares of Rs. 10 each, the first respondent had an authorized capital of Rs.10 The Sheth Group, the H.M. Patel Group, and the V.P. Patel Group were the three groups of shareholders.
- In this instance, the closely held private limited company's paid-up capital was 45% owned by Sheth Group (Respondents Nos. 4 and 5). Depending on their workload, the auditors had the right to request additional compensation.
- The National Company Law Appellate Tribunal (NCLAT) upheld the majority of the NCLT's ruling. A 1 crore rupees increase was made to the authorized capital. Only Rs. 90 lakhs of the additional capital provided was subscribed. The second and third respondents received leaves of absence.
- Following the Bank of Baroda's recommendation, the Board of Directors decided to enhance the authorized share capital from Rs. 1 crore to Rs. 2 crores.
- According to petitions filed under Sections 397 and 398 of the Companies Act of 1956, the V.P. Patel Group and the Sheth Group accuse the appellants of mismanagement and oppression. The petitions were dismissed by the National Company Law Tribunal (NCLT), which also gave directions that the NCLAT later upheld.
ISSUES RAISED
- Whether the action of the Board of Directors in allotting shares was unauthorized and impermissible in law?
- Whether the direction to allot shares in the impugned order is valid or not?
- Whether the increase in the paid-up capital from Rs. 1 crore to Rs. 2 crores in the the General meeting were valid or not?
ARGUMENTS ADVANCED BY THE APPELLANT
- The Learned Counsel on the behalf of the appellant argued that, the increase in the authorized capital was necessary to meet the company’s capital requirements. It was also mentioned that all the existing shareholder were offered shares in proportion to their holding (1:1) and given the choice to apply for shares.
- It was further mentioned that, it was incorrectly determined that the assignment of shares was flawed by the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT). They contend that it is inappropriate to characterize the actual assignment of shares as faulty because the increase in authorized capital was determined to be valid and not mala fide. The NCLT and NCLAT were unable to find any irregularities in the allocation procedure.
ARGUMENTS ADVANCED BY THE RESPONDENT
- The Learned Counsel on the behalf of the respondents mentioned that, the allotment of shares prior to the resolution to increase the authorized capital was unauthorized and illegal. The NCLT concluded that the allocation was defective because shareholders were not given the chance to reject the initial allocation before evaluating subsequent allocation.
- He also mentioned that, the worth of the company itself was not used to appraise the shares. The aim of the appellants was to seize control of the closely held business.
JUDGEMENT ANALYSIS
- The Court determined that, the increase in the authorized share capital was done in good faith and was not a case of managerial error or oppression. Following the counsel provided by the Bank of Baroda, the Board of Directors (BoD) decided to increase the Authorized Share Capital from Rs. 1 crore to Rs. 2 crores.
- The BoD's goal of raising cash has been acknowledged as being legitimate. The corporation alone could raise the authorized capital during a shareholder meeting. The BoD had not truly intended to increase the authorized Capital by the resolution. The Court invalidated the assailed order's directive to distribute shares.
- Furthermore, the instruction to allocate shares in the contested order was reversed because the court determined that the increase in the authorized share capital was done in good faith and was not a result of oppression or poor management. The Order passed in favour of the appellant.
CONCLUSION
The allocation of shares and the increase in authorized capital of a closely held private limited company gave rise to a disagreement in this instance. The respondents asserted that the increase was unlawful and was intended to seize control, while the appellants contended that it was essential and that the allocation was fair. The court found in favour of the appellants, holding that the direction to distribute shares was illegal but that the increase in capital was valid.
