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Judgment
Nainar Sundaram, J.—This Original Side Appeal is directed against the order of Shanmukham J. in C.P. No. 36 of 1978. The appellants
herein are respondents Nos. 16, 17 and 15, respectively; first respondents Nos. 2 to 15 herein are respondents Nos. 1 to 14 in the company
petition. For the sake of convenience, we shall refer to the parties as they stood arrayed in the company petition. The company petition was one
presented u/s 155 of the Companies Act, 1956 (1 of 1956) (hereinafter referred to as ""the Act""), for rectification of the register of members of the
first respondent company. The prayer is to order rectification of the register of members of the first respondent company, deleting therefrom the
entries showing the petitioner and respondents Nos. 11 to 14 as holders of the shares indicated against their respective names and direct the first
respondent to effect consequential changes in its books of account. The necessary facts leading to the filing of the petition may be delineated as
follows :
On March 15, 1974, the first respondent applied under the Capital Issues (Control) Act, 1947 (XXIX of 1947), of the consent of the Central
Government for its proposal to issue 13 lakhs equity shares of Rs. 10 each. On March 22, 1974, there was a meeting of the board of directors of
the first respondent and item No. 8 of the resolutions passed reads as follows :
Resolved that subject to sanction of the Controller of Capital Issues, 3,38,000 (three lakhs thirty eight-thousand) equity shares of Rs. 10 each be
allotted to the Tamil Nadu Industrial Development Corporation Ltd. and 3,22,497 (three lakhs twenty-two thousand four hundred and ninety
seven) equity shares of Rs. 10 each be allotted to Thiru B. Ananthaswami, his relatives, friends, associates and directors and nominee directors.
On April 22, 1974, the consent of the Central Government through the Controller of Capital Issues under Act XXIX of 1947 was accorded.
On September 28, 1974, there was a meeting of the board of directors of the first respondent and items Nos. 6 and 17 of the resolutions read as
follows :
The board recorded the allotment of shares to the following persons, made in pursuance of the resolution passed at the board meeting held on
March 22, 1974, and resolved to issue share certificates Nos. 22 to 32 for the following persons for the respective shares held by them.
Name No. of equity shares
Tamil Nadu Industrial Development
Corporation Ltd. 3,30,000
Shri V. R. Subburaman 1,000
Smt. V. S. Vairamani Ammal 1,000
Shri C. E. Krishnamoorthy 100
Shri C. K. Sarojini 100
Shri Gopal Srinivasan 600
Shri Venkatesan Srinivasan 500
Shri Viren J. Shah (director) 500
Continental Marketing P. Ltd. jointly with
Dr. Bharat Ram (director) 500
Shri Ashok V. Birla (director) 500
Further resolved that share certificates Nos. 33 to 40 be issued under the common seal of the company to the seven subscribers to the
memorandum and Shri P. Maruthai Pillai, whose shares were sub-divided.
Resolved that 13,000 equity shares of the face value of Rs. 10 each now standing in the name of the Tamil Nadu Industrial Development
Corporation Ltd. be and is hereby transferred to Shri E. C. P. Prabhakar, Shri A. M. Thangaraj, Shri C. Shanmukham, Shri G. Radhakrishnan,
Shri J. Jawahar and Shri K. Palanimanickam in pursuance of the applications for transfer submitted to the meeting by the managing director.
Further resolved that share certificates Nos. 41 to 46 be issued under the common seal of the company to the above-mentioned persons.
Item No. 8 of the resolutions passed in the same meeting reads as follows :
The managing director informed the board that subsequent to the circulation of the agenda papers for the board meeting, it was brought to the
notice of the management by the legal adviser of the company that if the accounts are closed on June 30, 1974, it may lead to the position of the
company becoming a subsidiary to the TIDCO in view of the fact that TIDCO holds the majority of the voting power in the company. The position
was discussed with TIDCO and to obviate this difficulty, TIDCO and Shri B. Ananthaswami mutually agreed that the shares for Shri B.
Ananthaswami and his associates may be allotted on or before September 30, 1974, and that TIDCO would transfer shares worth Rs. 1.3 lakhs
(representing 1 per cent. of the total equity capital of the company) to Shri E. C. P. Prabhakar, Shri A. M. Thangaraj, Shri C. Shanmukham, Shri
C. Radhakrishnan, Shri J. Jawahar and Shri K. Palanimanickam and the company''s accounts may be closed hereafter on 30th September every
year, so that, after carrying out the above operations, as on September 30, 1974, the company would not be a subsidiary to TIDCO. Accordingly,
the matter was discussed and it was resolved that the annual accounts of the company be hereafter closed on September 30, every year, and that
the managing director of the company may take steps to obtain the necessary permission therefore from the Income Tax authorities. On September
30, 1974, the petitioner and respondents Nos. 11 to 14 presented applications, five in number, to the first respondent for allotment of equity
shares as per the details indicated therein. On October 19, 1974, there was a return of allotments pursuant to section 75(1) of the Act.
Putting forth a plea that the allotment of shares was done by resolution dated March 22, 1974, referred to above, and this was in violation of
section 3 of Act XXIX of 1947, the petitioner sought for the above reliefs u/s 155 of the Act. Shanmukham J. found that on the contentions put
forth by the contesting respondents, the following questions arose for consideration :
(a) Whether the resolution dated March 22, 1974, has violated section 3 of the Capital Issues (Control) Act ?
(b) Whether the conditional allotment as contended by the respondents is permissible in law ? and
(c) What are the stages of creation, issue and allotment of shares in relation to one another ?
Whether the allotment of shares to the petitioner and respondents Nos. 11 to 14 is in breach of section 41(2) of the Act ?
Whether, by virtue of vagueness and uncertainty in the resolution dated March 22, 1974, in so far as all the members to whom the shares
allotted are not indicated, the allotment is hit by section 29 of the Contract Act ?
The learned judge, on an assessment of the materials disclosed as well as the law on the subject, came to the conclusion that the allotment of
shares on March 22, 1974, violated the provisions of Act XXIX of 1947; since such allotment was forbidden under law, it was void ab initio, and
there could not be conditional allotment without violating section 3 of Act XXIX of 1947. The above findings enabled the learned judge to grant
the reliefs asked for by the petitioner and in this view, the learned judge did not deal with the other questions, namely, questions Nos. 2 and 3. As
a result, the learned judge ordered the petition as prayed for, but without costs.
Before we deal with the contention which was for the first time put forth before us on behalf of respondents Nos. 15 to 17, we shall first advert
to the question as to whether, if the allotment was made on March 22, 1974, it would come within the mischief of Act XXIX of 1947. In fact, the
attempt on the part of Mr. S. Govind Swaminathan, learned counsel appearing for respondents Nos. 15 to 17, was primarily based upon a new
contention for the first time put for the before us that the actual allotment was made only pursuant to the resolution on September 28, 1974, after
the consent under Act XXIX of 1947. Though it is not expressly conceded before us that if the resolution dated March 22, 1974, is to be
construed as allotment of the shares, it will come within the mischief of Act XXIX of 1947, in that, there was no prior consent of the Central
Government on that date, because the consent came only on April 22, 1974, yet we find no concrete argument before us, projecting the stand
contrary to the above position. To complete our reasoning as a whole, we feel obliged to advert to these aspects also.
Section 3(2)(a) of the Act XXIX of 1947 reads as follows :
Control over issue of capital. - ......
(2). No company whether incorporated in the States or not, shall except with the consent of the Central Government, -
(a) make an issue of capital in the States;
Section 2(b) defines ""issue of capital"" in the following terms :
''issue of capital'' means the issuing or creation of any securities whether for cash or otherwise, and includes the capitalisation of profits or reserves
for the purpose of converting partly paid-up shares into fully paid-up shares or increasing the par value of shares already issued.
Section 2(e) defines ""securities"" as follows :
''securities'' means any of the following instruments issued, or to be issued, or created or to be created, by or for the benefit of a company, namely
:
(i) shares, stocks and bonds;
(ii) debentures;
(iii) mortgage deeds, instruments of pawn, pledge or hypothecation and any other instruments, creating or evidencing a charge or lien on the assets
of the company; and
(iv) instruments acknowledging loan to or indebtedness of the company and guaranteed by a third party or entered into jointly with a third party;
Section 13 contemplates penalty for violation of the provisions. It is an indisputed proposition that where the statute lays down that a violation of
its provisions shall carry a penalty, such violation would render the very act void ab initio. The definition of securities includes instruments by which
shares are created or to be created. Hence, the issue of capital will mean the creation of shares in the company. Before there could be allotment of
shares, there must be creation of shares. Section 3(2) of the Capital Issues (Control) Act, 1947 (XXIX of 1947), is unambiguous when it says that
the company shall not, without the consent of the Central Government even make an issue of capital. Issue of capital means the issue or creation of
any securities as per section 2(b). Hence, even creation of capital is forbidden u/s 3(2) without the prior consent of the Central Government.
Though we speak about allotment in general terms, we make it clear that the expression ""allotment"" used in this judgment, wherever the context so
requires, would mean the issue of capital within the meaning of sections 3(2), 2(b) and 2(e) of the Capital Issues (Control) Act, 1947 (XXIX of
1947). Judicial precedents have also countenanced the proposition that creation of shares must precede the issue and allotment thereof. The
classical pronouncement which is oft-quoted is the one expressed by Farwell L.J. in Mosely v. Koffyfontein Mines, Ltd. [1911] 1 Ch 73, and it is
worthwhile to recapitulate the following dictum in the said decision [1911] 1 Ch 84 :
As regards the construction of these particular articles, it is plain that the words ''creation'', ''issue'' and ''allotment'' are used with the three different
meanings familiar to business people as well as to lawyers. There are three steps with regard to new capital; first, it is created; till it is created, the
capital does not exist at all. When it is created, it may remain unissued for years, as indeed it was here; the market did not allow of a favourable
opportunity of placing it. When it is issued, it may be issued on such terms as appear for the moment expedient. Next comes allotment. To take the
words of Stirling J., in Spitzel v. Chinese Corporation [1899] 80 LT 347, he says : ''what is an allotment of shares broadly speaking, it is an
appropriation by the directors or the managing body of the company of shares to a particular person''.
In Sri Gopal Jalan and Company Vs. Calcutta Stock Exchange Association Ltd., , Sarkar J., after adverting to the dictum of Farwell L.J., in
the above decision, laid down as follows (at p. 865 of 33 Comp Cas) :
It is beyond doubt from the authorities to which we have earlier referred, and there are many more which could be cited to show the same
position, that is company law ''allotment'' means the appropriation out of the previously unappropriated capital of a company, of a certain number
of shares to a person. Till such allotment, the shares do not exist as such. It is on allotment in this sense that the shares come into existence.
Learned counsel for the appellant has not been able to cite any case where the word ''allotment'' has been used to describe a transaction with
regard to an existing share, that is, a share previously brought into existence by appropriation to a person out of the authorised capital. In every
case, the words ''allotment of shares'' have been used to indicate the creation of shares by appropriation out of the unappropriated shares capital to
a particular person. We find no reason why the word ''allotment'' in section 75 should have a different sense.
In Shri Gopal Paper Mills Co. Ltd. Vs. Commissioner of Income Tax, Central, Calcutta, , the dictum of Farwell L.J. has once again found
approval.
An appraisal of the legal position as we could glean from the provisions of Act XXIX of 1947 as well as the pronouncement which we have
referred to above, leave us with no other alternative but to concur with the view of Shanmukham J. that the allotment as per the resolution dated
March 22, 1974, and that appears to be the factual position, had run in violation of the provisions of Act XXIX of 1947, and, as such, is void ab
initio. But, we find that Mr. S. Govind Swaminathan, learned counsel for respondents Nos. 15 to 17, wants to place the matter from a different
angle, drawing a particular inference of his own from the factual materials disclosed. Learned counsel would like to place the case in the following
manner. According to him, after the consent was obtained on April 22, 1974, under Act XXIX of 1947, there was a resolution on September 28,
1974, and in implementation of the same, applications for allotment were made by the petitioner and respondents Nos. 11 to 14 on September 30,
1974, on the same date shares were allotted to them; and on October 19, 1974, return allotments pursuant to section 75(1) of the Act was made
and hence, the matter could not come within the mischief of Act XXIX of 1947.
In answer, Mr. T. Dilip Singh, learned counsel for the petitioner, would submit that this is a submission not conceived, not expressed and not
advanced in answer to the company petition and before the learned single judge all that was pleaded by the contesting respondents was that there
was, in fact, allotment of the shares on March 22, 1974, it was a conditional allotment and the law permitted conditional allotment and the
allotment was implemented only after the consent under Act XXIX of 1947, was obtained on April 22, 1974, after requisite applications in writing
were made u/s 41(2) of the Act. Learned counsel, in particular, draws our attention to the following reasoning expressed by the learned single
judge which clearly bring out the express stand projected before the learned judge by the contesting respondents :
... In the instant case, what is contended is that there was only a conditional allotment and not an allotment as such before the sanction of the
Controller of Capital Issues under exhibit R-3 was obtained and that, therefore, there is no violation of section 3 of Act 29 of 1947. That is all that
was contended by Mr. T. Raghavan, learned counsel for the company. But, I find what is prohibited u/s 3 considered together with the definition of
issue of capital, is not only the allotment of shares but even the very creation and issue of shares as well. If the company were to make a
conditional allotment, it means that it has already created the shares. Then, as rightly pointed out by Mr. Dilip Singh, learned counsel for the
petitioner, creation itself is forbidden u/s 3. While so, the fact that the company had made only a conditional allotment will presuppose that there
was creation and that consequently such creation being forbidden u/s 3 of the Act 29 of 1947, even the conditional allotment made under exhibit
R-2 is void ab initio.
Apart from the above observations, the learned judge, in other places, has opined that the courts have not held the conditional allotment will
not violate section 3 of Act XXIX of 1947 and it is not possible to accept the proposition that conditional allotment is not forbidden under Act
XXIX of 1947.
We would have declined to permit the learned counsel for respondents Nos. 15 to 17 put forth this new plea, namely, that the allotment came
to be made only pursuant to the resolution dated September 28, 1974, yet, we find that the facts do not support this new stand. The wordings of
the resolution dated March 22, 1974, are unambiguous. The resolution is categoric that the equity shares ""be allotted"". Item 6 of the resolutions
passed on September 28, 1974, records the allotment of shares to respondents Nos. 2 to 10 and the Tamil Nadu Industrial Development
Corporation Limited pursuant to the resolution dated March 22, 1974. Item 17 of the resolutions, we could see from the extract made supra, deals
with the subject of transfer of equity shares. Item 8 of the resolutions dated September 28, 1974, has got two parts and the operative part, which
is the second part, speaks about ""the annual accounts of the company be here after closed on 30th September every year and that the managing
director of the company may take steps to obtain the necessary permission therefore from the Income Tax authorities."" The first part relates to the
discussion with TIDCO, and TIDCO and the petitioner mutually agreeing that the shares for the petitioner and his associates to be allotted on or
before September 30, 1974. Item 8 is one of the resolutions passed and item 6 of the resolutions refers to and affirms the resolutions dated March
22, 1974, and records the allotment of shares for the first time and it could only be held to be a follow-up action and supplemental to the resolution
already passed on March 22, 1974. It will be farfetched to accept a case and that too, for the first time put forth before us, that only on September
28, 1974, as per item 8 of the resolutions, the allotment of the shares for the first time came to be sanctioned and it was followed up by the other
subsequent proceedings. No other factual inference is possible except to hold that the reference to the petitioner and his associates is only in
implementation of the allotment already sanctioned pursuant to the resolution dated March 22, 1974, and all the relevant resolutions in this behalf
dated August 23, 1974, have no independent existence and they only indicate a follow-up action.
There were submissions, profuse indeed, made by Mr. T. Dilip Singh, learned counsel for the petitioner, and by Mr. S. Govind Swaminathan,
learned counsel for respondents Nos. 15 to 17, on the question of the formalities to be satisfied before there could be a valid allotment of shares.
Mr. T. Dilip Singh would draw out attention to very many authorities to impress upon us the proposition that a person must agree in writing to
become a member of a company, allotment of shares could be made only by the resolutions of the board since, on principle, the management of
the company is vested in the board; and notice of allotment must reach the allottee in one way or the other. In contrast, Mr. S. Govind
Swaminathan, learned counsel for respondents Nos. 15 to 17, would submit that it would suffice the purpose if a person agrees in writing to
become a member and the allotment need not necessarily be the subject-matter of the resolution of the board and the factum of allotment could
also be derived from certain indisputable facts. These submissions could have relevance only to the disputed question as to whether there was, in
fact, an allotment on March 22, 1974. These aspects would require advertence to only if the contention, for the first time put forth before us, that
there was an allotment on September 28, 1974, is to be accepted. On facts, we found no substance in this new plea and hence, it will be totally
redundant for us to advert to these aspects and express any opinion with regard to the formalities to be satisfied for allotment of shares. The attack
on the resolution on March 22, 1974, has been upheld by us on the other ground.
The last contention of Mr. S. Govind Swaminathan, learned counsel for respondents Nos. 15 to 17, is that the petitioner is estopped form
putting forth the present plea stacking the allotment of shares to himself and his associates since at all relevant times, he was the managing director
of the first respondent and he was a party to the resolutions on September 28, 1974, he presented the application for allotment on September 30,
1974, along with his associates, and he only filed the return of allotments on October 19, 1974. Learned counsel relies on the pronouncement of
the Supreme Court in Narayandas Shreeram Somani Vs. The Sangli Bank Ltd., in support of this submission of his. We are afraid, we cannot
sustain this contention of the learned counsel for the simple reason, if the allotment had, in fact, taken place on March 22, 1974, and it had come
within the mischief of Act XXIX of 1947 and as result, the very allotment was void ab initio, the plea of estoppel could not be pressed forth. As
pointed out by Shanmukham J., when once the allotment was void ab initio, there could be no contrariety in the eye of law and none amongst the
petitioner and respondents Nos. 11 to 14 could be a member of the first respondent. The decision of the Supreme Court has dealt with a situation
where a director of a banking company dealt with shares on the footing that the allottees are the holders of the shares with a clear knowledge of
the circumstances that he was interested in the particular transaction of the board meeting of the company. In a suit by the company against the
allottees, he was held to be estopped from contending that the allotment was invalid. We are not facing any such contingency. Here, the transaction
was void ab initio and there is no scope for bringing in the principle of estoppel at all.
For the reasons expressed by us above, we are obliged to concur with the decision of Shanmukham J. and, as a result, this appeal fails and the
same is dismissed. No costs.