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IN THE COMPANY LAW BOARD

EASTERN REGION BENCH AT KOLKATA
Decided On: 12.06.2006
Appellants: Shri Subhas Ghosh
Vs.
Respondent: Happy Valley Tea Co. Pvt. Ltd.
Hon'ble Judges/Coram:
S. Balasubramanian, Chairman
Counsels:
For Appellant/Petitioner/Plaintiff: S.N. Mookherjee, Sr. Adv., R.
Banerjee and T. Aich, Advs.
For Respondents/Defendant: S.K. Majumdar, Adv.
Subject: Company
Acts/Rules/Orders:
Companies Act, 1956 - Sections 111, 111(4) and 113
Cases Referred:
In re: Calcutta Stock Exchange Association Ltd.
MANU/WB/0120/1957 : AIR 1957 Cal. 438
Disposition:
Petition Dismissed

ORDER
S. Balasubramanian, Chairman

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1. The allegation of the petitioner in this petition, filed under Sections 111 and 113
of the Companies Act, 1956 ("the Act"), is that M/s. Happy Valley Tea Company
Private Limited ("the company"), after allotment of 16,000 equity shares to the
petitioner, did not hand over the share certificate/s in respect of these shares and
has, thereafter, illegally cancelled the allotment and as such, the company should
be directed to restore the allotment and deliver the share certificate in respect of
these shares.
2. A summary of the petition is : The petitioner was appointed as an agent for the
company in September, 2000, authorizing him to sell and/or encourage for sale, of
tea manufactured/to be manufactured by the company on a fee of Rs. 15,000/-per
month. At the behest of the directors of the company, the petitioner also advanced,
at various times, a sum of money aggregating to Rs. 11.00 lakhs to the company
with an interest @ 24% per annum. Since the directors of the company expressed
their desire that the petitioner should become a shareholder, he applied for 16,000
equity shares of Rs. 10/- each at a premium of Rs. 2/- per share.
He remitted Rs. 1,92,000/- as consideration in various installments in the months
of February/March, 2001. The company has acknowledged all these payments by
money receipts indicating clearly that the same was advanced against allotment of
equity shares. By a letter dated 15.3.01, the company informed the petitioner that
in a Board meeting held on 8.3.2001, the Board had decided to enhance the issued
equity shares of the company from 52,000 equity shares to 70,000 equity shares
and that the enhanced equity shares would be issued to the petitioner or his
nominee. It was also indicated in that communication that the company was
convening an Extra-Ordinary General Meeting (EOGM) for getting the
shareholders approval for increasing the issued capital and for the approval of the
draft resolution for allotment of 18,000 equity shares to the petitioner. The
company also filed Form No.2 on 8.3.02 indicating that 16,000 equity shares had
been allotted to the petitioner on 25.2.02. Since the petitioner had not received the
relevant share certificates, he made enquiries from time to time and also wrote to
the company by a letter dated 12.4.03. The petitioner caused an inspection of the
records of the company in the office of the Registrar of Companies, West Bengal
(ROC) and from the Annual Return made upto 30.9.02, filed on 19.2.03, he found
that his name had not been included as a member of the company. Since the
petitioner did not receive any reply to the legal notice issued to the company on
20.9.03 he has filed this petition for a declaration that the petitioner is having a
right, title and interest in respect of 16,000 equity shares of the company and also
for rectification of the register of members to include his name as a shareholder in

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respect of these charges and also to pass on all benefits to the him like dividend
etc. in respect of these shares including delivery of relevant share certificate/s.
3. In the reply, the company has admitted the fact that the directors of the company
had requested the petitioner to provide funds to tide over the temporary financial
crisis of the company and also the fact that he had lent about Rs. 11.00 lakhs. It
has. also admitted that the company received Rs. 1.92 lakhs for allotment of shares
to the petitioner subject to approval of the shareholders. In the letter dated 15.3.01,
it was specifically mentioned that the allotment of shares to the petitioner would be
subject to the approval of the shareholders in an EOGM. The company also filed
Form No. 2 with the ROC indicating the allotment of shares to the petitioner with
the clear understanding that the allotment would be subject to shareholders
approval and the petitioner was fully aware of the same. In the General Meeting
held on 30.9.02, after due deliberation, the shareholders decided that the petitioner
did not qualify for acquiring any share of the company due to his nefarious
activities and ill motive and declined to allot shares to him. By a letter dated
4.10.02 (Annexure-6), the same was communicated to the petitioner. In view of
this, the company filed a Form 32 canceling the allotment. Accordingly, the
company has sought for dismissal of the petition.
4. Shri Mukherjee, appearing for the petitioner, submitted that every fact averred in
the petition had been admitted by the respondent including receipt of consideration
for the equity shares and allotment of shares in the board meeting held on 8.3.01
and subsequent filing of Form No. 2. In terms of Article 4, shares are at the
disposal of the directors and they have the power to allot shares on such terms and
conditions and by exercising this power, the board had allotted the shares to the
petitioner and the question of obtaining consent of general body thereafter does not
arise. The company has no power to cancel the allotment which would not only
result in reduction of share capital for which procedures as per the Companies Act
has to be followed, it cannot remove the name of the petitioner from the register of
Members without the approval of CLB In re. Calcutta Stock Exchange
Association Ltd. MANU/WB/0120/1957 : AIR 1957 Cal. 438. In view this legal
position, there is no question of filing a Form No.2 canceling allotment already
made. Therefore, the prayers sought for should be granted and the petitioner should
be declared to be the shareholder of 16,000 equity shares and accordingly, the
name of the petitioner should be put in the register of members and the relevant
share certificates should be ordered to be delivered to the petitioner.1
1 http://www.lawyerservices.in/Subhas-Ghosh-Versus-Happy-Valley-Tea-Co-(P)-Ltd-2006-06-12

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5. Shri Majumdar, appearing for the respondent, submitted that the board did allot
the shares, but it was on the clear understanding that the same would be subject to
the approval by the shareholders. In the letter dated 15.3.01, a copy of the same has
been annexed by the petitioner himself as Annexure-E, the petitioner was
specifically informed that the company would convene an EOGM to increase the
share capital and also allot the shares to the petitioner. However, in the Annual
General Meeting held on 30.9.02, the general body had unanimously decided not to
issue/allot any share to the petitioner. Therefore, Form No.2 filed on 8.3.02
indicating allotment of shares to the petitioner on 25.2.02 was cancelled by filing
another Form 2 on 22.5.03. As soon as the general body decided not to allot any
share to the petitioner, he was also informed of the same by a letter dated 4.10.02,
Since the general body declined to allot shares to the petitioner, the Annual Return
as on 30.9.02, filed on 19.2.03, did not indicate any increase in the share capital
and did not include the name of the petitioner as shareholder of the company.
6. I have considered the pleadings and arguments of the counsel. Since the facts are
all admitted, the only issue for consideration is whether, the Board of the company
was legally entitled to cancel the allotment by way of filing a Form 2 on 8.3.02,
There is nothing on the record to show that after the allotment of the impugned
shares to the petitioner, his name was entered in the Register of Members of the
company. Perhaps it was not. Therefore, the grievance of the petitioner should be
that without sufficient cause his name has been omitted to be entered in the
register, even though shares had been allotted. In terms of Section 111, one can
have a grievance only if the name is omitted to be entered, if he could establish that
it was without sufficient cause. If the omission is with sufficient cause, then, no
cause of action would lie.
7. In the present case, the entire case of the petitioner is rested on the letter dated
15.3.2001 and the Form 2 filed on 8.3.2002. In the letter date 15.3 2001, the
company had specifically stated that the company was calling for an EOGM to get
the approval of the shareholders for allotment of shares to the petitioner, and
therefore, the petitioner was aware that without the approval of the shareholders,
no shares could be allotted to him. Shri Mookerjee contended that since the Board
has full powers to allot shares, there is no need to get the approval of the
shareholders. Article 4 of the Articles of association of the company reads: "The
shares shall be at the disposal of the directors and they may allot or otherwise
dispose of them to such persons at such times and generally on such terms and
conditions as they think proper-----". From this Article, it is evident that the Board

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has the power to decide to allot shares on such terms and conditions as they think
proper. In the present case, as communicated to the petitioner, the Board had
thought it fit to get the approval of the shareholders for allotment of shares to the
petitioner. Therefore, when the allotment of shares to the petitioner, to his own
knowledge, was subject to the approval of the shareholders, he cannot now claim
that shareholders approval was not necessary. He cannot take advantage of the
allotment made, which has not been approved by the shareholders, whose approval
was a precondition under which the shares were offered to the petitioner. Shri
Mookerjee contended that cancellation of allotment would result in reduction of
share capital, which cannot be done without court's approval. This does not in any
way bestow any right on the petitioner to claim the shares. Need to approach the
CLB for rectification under Section 111(4) would arise only if a member's name is
either omitted from or entered in the register of members without sufficient cause.
In the present case, since the name of the petitioner has been omitted from the
register of members on sufficient cause (even assuming his name was earlier
entered in the register after allotment), i.e., members have not approved allotment
of shares to the petitioner, which was a prerequisite, there is no scope to allow the
petition. However, since no share has been allotted to the petitioner, the amount of
money invested by him for the shares should be refunded to him within a period of
one month of the date of this order. I hereby direct the company to do so within the
said time.2
8. The petition is accordingly dismissed without any order as to costs.

2 http://indiankanoon.org/doc/109623/

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Share issue is essentially the process by which companies pass on new shares to
shareholders, who may themselves be new or existing shareholders. Companies
can issue shares to both individuals or corporate bodies. Alongside the issue of
shares, you may see the term share allotment used. While there can be subtle
differences between issuing shares and alotting them, for most companies and in
most circumstances they amount to exactly the same process. So well use both
terms to mean the same thing here.
We must, however, distinguish between a share allotment and a share transfer. With
a share allotment, the shares are created and issued by the company to the people
who become the companys shareholders. Shares will generally be issued by the
company at the start of its life and some companies will issue more shares later on.
A share transfer, in contrast, involves existing shares being passed from an existing
shareholder to someone else. That will always take place after the company has
been formed and, although the company may be involved, it is not creating or
allotting those shares. Weve looked at how to transfer shares elsewhere, so well
focus on the allotment of shares here.
The main reason a company will issue new shares is to raise money to finance the
business. Some examples will help to show the different scenarios where an
allotment of shares may be considered. Heres our top 10:
1.

When the company is first incorporated, a number of shares will usually be

issued. This share issue, along with any money that the company may borrow,
enables the company to trade. The initial shareholders are often referred to as
subscribers, because they are said to subscribe to the new companys
Memorandum of Association.

2.

Shares may be issued in order to repay some or all of the companys borrowing.

3.

New funds may simply be required to grow the business organically.

4.

Issuing shares might also fund a particular new development or project, which
will often require significant initial capital with the rewards (hopefully) seen in
later years.

5.

A share issue could be used to fund the purchase of another company. This may
mean raising cash from a share issue and using that cash to buy the other business.
Alternatively, new shares could be issued to the current shareholders of the target

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company theyd effectively be exchanging their shares in the company being

purchased for shares in the company that is buying it.
6.

To repair a damaged balance sheet. Many companies, large and small, found
themselves needing to allot shares to continue trading in the recent financial crisis.

7.

The company can make a bonus or capitalisation issue of shares to existing

shareholders. Instead of the shareholders needing to pay for the shares themselves,
in this type of share issue the company uses its own profits to fund the allotment
instead. This usually has the effect of reducing the value of the shares in issue,
which may in turn make them more marketable to investors.

8.

If shareholders prefer not to receive a cash dividend, the company may offer
them a scrip dividend instead allotting shares of the same value as the cash
dividend. This is often popular among companies because issuing shares as a
dividend does not impact cashflow in the way a cash dividend does.

9.

If a director or employees exercises a share option that theyve been granted by

the company, they may acquire the shares via an allotment to them.

10.

As part of a new director or senior employee joining the business or an existing

employee becoming a director, they may acquire shares in the company. Often
used by professional companies, this can both demonstrate and cement the
employees commitment to the business theyll have a clear and direct interest in
the companys success. The shares would either be passed to the employee by a
new allotment of shares or via a transfer from existing shareholders.3

3 http://www.informdirect.co.uk/shares/why-issue-shares/

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Conclusion
The terms "allotting shares" and "issuing shares" are often used interchangeably. In
some cases, particularly when shares are created by a public company, there may
be a difference. Share allotment, strictly, is the allocation of the right to certain
shares to particular applicants for them. Such "allottees" may be sent allotment
letters (which may be renounceable in favour of others), and the actual issue of the
shares occurs later. In most private companies allotment and issue will be the same
process. A company may allot shares when it is first set up or at any time during its
lifetime in order to raise share capital and/or introduce new shareholders.