Case No: Civil Appeal Nos. 8194 of 2018 and 8195 of 2018

Judges Name: Hon’ble Judges K.M. Joseph and B.V. Nagarathna, JJ.

Order Date: 15.06.2023

Facts of the Case:

• A closely held private limited company with ten lakh equity shares of Rs. 10 each, had an authorized capital of Rs. 10. Shareholders included the Sheth Group, H.M. Patel Group, and V.P. Patel Group. 
• The Sheth Group owned 45% of the company’s paid-up capital. Auditors had the right to request additional compensation based on their workload. National Company Law Appellate Tribunal (NCLAT) upheld most of the National Company Law Tribunal’s (NCLT) ruling. Authorized capital was increased by Rs. 1 crore, but only Rs. 90 lakhs of the additional capital were subscribed. 
• Board of Directors decided to enhance authorized share capital from Rs. 1 crore to Rs. 2 crores based on Bank of Baroda’s recommendation. 
• V.P. Patel Group and Sheth Group filed petitions accusing the Appellants of mismanagement and oppression under Sections 397 and 398 of the Companies Act of 1956. NCLT dismissed the petitions, and NCLAT upheld the NCLT’s directions.

The Hon’ble Supreme Court Observed and Held as Follows:

• In the said case, the Court found that the expression ‘capital of a company’ was an ambiguous phrase and may mean either Issued Capital or Authorised Capital. 
• The Resolution to allot the shares in 1:1 ratio and the indication that shares, which are not applied for, could be the subject matter of allotment to other shareholders, were all to become operative upon the applications being considered. The Minutes further reveal that the consideration of the application was to await the increase in the Authorised Capital in a duly constituted meeting of the General Body of shareholders. It is, no doubt, true that the proper way of doing it could have been to pass a Resolution after the shareholders resolved to increase the Authorised Capital. 
• The purpose of the Board of Directors to increase the capital has been admittedly found to be bona fide. An incidental gain, namely the change in the shareholding pattern is entirely the inevitable result of the refusal of the Respondent’s groups to apply. We cannot proceed on the basis that the Appellants foresaw and deliberately planned the whole affair. If only the Respondents had applied, the situation would not have happened. 
• The purported object was shown as generating fresh funds but in place of Rs. 90 lakhs only Rs. 21 lakhs were brought in goes, the fact that the paid-up capital was apparently shown as credited by cancelling loans due by the company to the Appellants group, should not prevent this Court from overlooking the fact that the debt-equity ratio has undoubtedly been improved.
  
• Therefore, in the facts, the Appellants cannot be described as having acted in a defective or in an unfair manner, in the matter of allotment of further shares particularly when the contention of the Respondents about the bona fides of the decision to increase the authorised capital has been found in favour of the Appellants. 
• The appeals are partly allowed. The direction to allot shares in the impugned order is set aside. The order for conducting audit will remain undisturbed. There will be no order as to costs. 
• The position under the Companies Act, 1956, Under Section 81, remained the same in that it is only the company, in its General Body Meeting, which could increase the Authorised Capital. The position still continued that call it increase in Subscribed Capital, it must be within the limits of the Authorised Capital.