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07 November 2016

Conversion of shares and increase of authorized share capital, when illegal

In the present petition before the Supreme Court, the contention of the respondents (“Sanwalka Group”) was that the company had come under the control of the appellants (“Gupta Group”) by various actions and omissions. For the aforesaid reason, the respondents had filed a petition before the Company Law Board under Sections 397 and 398 of the Companies Act, 1956 (“Act”). The bone of contention was certain shares that were initially held by the appellants and subsequently forfeited. Upon forfeiture, the said shares were issued to the respondents.

According to the respondents, the appellants without notice to the respondents had increased the authorized share capital of the company. Through a board meeting convened on the same day, this decision was ratified and it was decided that the company would allot bonus shares in the ratio of 60:1 i.e. 60 bonus shares for each fully paid up equity and preference share. No bonus shares were issued to the Sanwalka Group. Through a series of further allotment, shares were issued to the Gupta Group. The respondents contended that these actions were being done to reduce the shareholding of the Sanwalka Group, which was in majority, to a negligible minority in the company.

The Supreme Court on 7-10-2016, noted that the Gupta Group was guilty of not having issued a call notice under Section 53 of the Act and held that forfeiture of the shares upon not responding to the call notice was not envisaged under the Articles of the company. The Court in this case of Tin Plate Dealers Association Pvt. Ltd. v. Satish Chandra Sanwalka further observed that notice of the general meeting in which the authorised share capital of the company had been increased, the issue of bonus shares and conversion of preference shares to equity shares had been discussed, was not given to the Sanwalka Group in contravention with Section 172(2) read with Section 41 of the Act. The Supreme Court also held that the issue of bonus shares out of the revaluation reserves of the company, was ultra vires the power of the directors since the Articles did not empower the board to issue such shares. Striking down the share conversion of preference shares into equity shares, the Apex Court held that due to a series of unacceptable actions by Gupta Group, this was a clear case of oppression.