The Supreme Court, vide its judgement dated June 15, 2023, in Hasmukhlal Madhavlal Patel & Anr. versus Ambika Food Products Pvt. Ltd. & Ors. (Civil Appeal No. 8194 and 8195 of 2018), held that the decision to allot additional shares of the company cannot be overturned merely on the ground that the Promoters of the company have also benefitted from the allotment. The court emphasized that the allotment of shares should be evaluated based on whether it is in compliance with the provisions of the Companies Act and the relevant regulations and whether it is in the best interests of the company as a whole.

FACTUAL MATRIX OF THE DISPUTE:
The Respondent (Ambika Food Products Pvt. Ltd.) is a closely held private limited company, controlled by 3 groups of shareholders holding varying percentages of shares in the Respondent-company namely the H.M. Patel Group (Appellant), the Sheth Group, and the V.P. Patel Group held 30.80, 45, and 24.20 percent of the paid-up share capital in the company, respectively. When the company applied for a term loan, it was advised by the Bank to raise its equity capital from Rs. 1 crore to 2 crore. Consequently, the authorised capital of the company was increased. After the issue of additional shares, the H.M. Patel Group’s shareholding increased to 63.58% of the paid-up share capital. The shareholding of the other two groups- the V.P. Patel Group and the Sheth Group stood at 12.74% and 23.68% percentage, respectively.

The V.P. Patel Group and the Sheth Group filed petitions under Sections 397¹ and 398² of the Companies Act, 1956 before the National Company Law Tribunal (NCLT), alleging mismanagement and oppression by the H.M. Patel Group, and challenged the latter’s decision to increase the authorised share capital of the company. The NCLT upheld the increase in the authorised share capital of the company. However, it found that the distribution of the shares was ‘defective’. Thus, it directed that the allotment of shares in respect of the increased share capital was to be made to all the existing shareholders of the company, in proportion to their shareholding. The same was upheld by the NCLAT in appeal. Against this, the H.M. Patel Group (the appellants) filed an appeal before the Supreme Court.

SUPREME COURT’S DECISION
The Court took notice of the minutes of the Extraordinary General Meeting of shareholders held in 2010, where the decision to increase the authorised share capital of the company to Rs. 2 crores was taken. It further took notice of the fact that though no one from the Sheth Group or the V.P. Patel Group was present in the Meeting, the shareholders were sent notices about the decision of the said Meeting so that they could take steps to subscribe to the additional capital sought to be raised which means the other shareholders’ group had knowledge of the proposal to increase the share capital of the Respondent-company.

Regarding the question of whether oppression had been occasioned by the manner in which the allotment of the additional shares was done, the Court acknowledged Section 81(3) of the Companies Act, 1956 which explicitly exempts private limited companies from the provisions of Section 81, which pertains to the further issuance of capital and emphasized that the actions of the Directors should be assessed against a higher standard.

While assessing if the Appellants acted in a defective or unfair manner in allotment of further shares, the Court opined that the Appellant cannot be described as having acted in an unfair manner, in the matter of allotment of further shares particularly when the contention of the Respondent about the bona fides of the decision to increase the authorised capital has been found in favour of the Appellant. Therefore, the Appeal was partly allowed and the direction of NCLAT to allot shares was set aside.

The court’s decision signifies that the mere fact that promoters have benefited from the allotment of shares does not render the decision invalid or illegal. The legality and validity of such allotments should be determined based on the procedural and substantive requirements prescribed under the Companies Act.

By - Prachi Pandey