Further issue of shares when considered as Oppression by a shareholder

Oppression is defined as ‘when affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members’. The following are some activities that could be construed as Oppressive in nature:

  • Not calling a general meeting and keeping shareholders in the dark.
  • Non-maintenance of statutory records and not conducting affairs of the company in accordance with the governing laws.
  • Depriving a member of their right as provided under the Companies Act.
  • Issue of further shares benefiting a section of shareholders without the proper notice/consent of the members of the Company.

The new Companies Act 2013 (the Act) has brought in quite a rigour, even for private limited companies for further issuance of shares. The issuance of further shares to its existing shareholders or new investors, are governed under the provisions Section 62 (Rights Issue process) and 42 (Private Placement process) of the Act, respectively. Under the old Companies Act, 1956, private limited companies were exempt from the processes under section 81, which dealt with further issuance of shares.

Private Placement process requires consent of the current shareholders, before offering the securities to the new investors. In case of Rights Issue process, adequate notice is to be given to existing shareholders, wherein the existing shareholders can either subscribe or decline the offer. Upon decline, the Board can dispose the securities to any new investor.

The Articles of Association may have protective provisions/ contractual obligations to be met with existing shareholders, such as Anti-Dilution Rights, Pre-emptive rights and the like, which has to be checked, before such further issuance.

The point being, the shareholders consent is required for any further issuance of securities.

In a recent case of Mrutyunjay Kar. Vs. Purbanchal Petroleum Private Limited & Dhananjay Kar, National Company Law Tribunal, Kolkata Bench (the NCLT) has charged the petition for oppression and mismanagement under Section 397 & 398 (“Petition”) of the Companies Act, 1956 and has nullified the invalid allotments made without any proper intimation and approval of the existing shareholders and construed as Oppression.

Facts of the Case

The Petition was filed by Mr. Mrutyunjay Kar (the Petitioner) the initial director and shareholder of Purbanchal Petroleum Private Limited (the Company) who had subscribed to Memorandum of Association with Mr. Dhananjay Kar, Respondent 2, having initial shareholding of 49% and 51% respectively.

After the initial investment, R2 made further rounds of investment into the company by issuing the shares to the other shareholders (also respondents to the petition) during the period from 2010 t0 2013, to meet its loan liability and other financial requirements. This led to shareholding of Petitioner reduce from 49% to 15.45%.

The Petitioner filed the oppression and mismanagement action alleging that there has been no intimation regarding the board meeting and shareholders meeting for increase in paid-up share capital of the Company and that R2 had acted unlawfully and detrimental to the interests of the Company.

The Petitioner further alleged that there has been mismanagement on the grounds of (i) there has been no intimation of board meeting and no quorum in the board meeting (ii) R2 had changed his own designation as Managing Director and appointed his wife as another director; (iii) R2 had not given adequate notice before holding the Shareholders’ Meeting to increase the authorized share capital and issuance of shares to other shareholders.

Further R2 in his reply stated that the issuance of shares was to the family members, therefore, formal intimation was not served to all the members.

Judgement

NCLT observed that the increase in authorised share capital and issuance of shares to R2 and other respondents was carried out without any formal notice and consent of the Board and Shareholders. Pursuant to the further issuance of shares, a section of shareholders were benefited and reduced the shareholding of Petitioner. Due to these reasons, NCLT held there was oppression of the minority shareholder.

In light of this, NCLT directed R2 and other respondents, to nullify the increase in the authorised share capital and also nullify the shares issued to R2 and other respondents.

Author: Ashwin Bhat

Advertisements