IN THE HIGH COURT OF PATNA 

Appearances : Anil Kumar Sinha and M. M. Prasad for the Petitioner. 

P. K. Sinha and M. S. Mittal for the Respondent. 

JUDGMENT 

CHAUBE, J. 

1. This company petition purporting to have been filed under section 107, read with section 10, of the Companies Act, 1956 (hereinafter' the Act') was filed by the petitioner, Girish Kumar Kharia, one of the holders of the equity shares of the opposite party-company, the Industrial Forge & Engg. Co. Ltd., having its registered office in the town of Jamshedpur in the district of East Singhbhum for cancellation of variation of equity shares from 1,50,000 having face value of Rs. 10 each to 2,30,500 without notice to, and prior knowledge of the petitioner; and restraining the opposite parties from giving effect to such variation and holding further meeting until such cancellation. The case of the petitioner is that the said company, which has been arrayed as opposite party No. 1, was established on 5th June, 1980 and registered under the provisions of the Act as a company limited by capital of equity shares. The company has its own memorandum and articles of association. As on 10th November, 1998, the issued paid-up capital of the company was 22,50,000 divided into 1,50,000 issued capital of equity shares of Rs. 10 value and 7,500 preferential shares of the value of Rs. 100. Out of the total number of issued equity shares, the petitioner jointly with his wife Smt. Geeta Kharia was holding 25,000 shares worth Rs. 2.50 lakh. However, on 18th December, 1998 he received a notice dated 16th December, 1998 issued by the opposite party No. 1 under the signature of its managing director-opposite party No. 2 informing him about holding of a meeting on 12th January, 1999 for resolving with or without modification for enhancement of the paid-up capital of the company from Rs. 23,05,000 to Rs. 30,55,000 by issue of 75,000 equity shares of Rs. 10 each at par. On receiving such notice, he came to know for the first time that the number of equity shares of the company had been increased to 2,30,500 from 1,50,000 without any information to him. According to him, such increase or variation in the number of equity shares was illegal and in complete violation of the constitution of the company as alleged the provisions of the Act. Consequently, he presented the petition in this court on 6th January, 1999; and simultaneously filed an application under section 151 of the Code of Civil Procedure, 1908, read with section 10 of the Act, for restraining opposite parties from holding meeting scheduled on 12th January, 1999 or even on any subsequent date for taking any decision on the agenda mentioned in the notice dated 16th December, 1998. 

2. When the petition was presented on 2nd February, 1999, there was a direction for issuing notice of the application for injunction to opposite party Nos. 1 and 2. In the meantime, the said opposite parties were directed not to proceed on the notice (annex. 5) if the meeting pursuant thereto had already not been held. After service of the notice, opposite party Nos. 1 and 2 appeared and filed counter-affidavit to the main petition, and application for vacating the interim order of restraint passed on 2nd February, 1999. Consequently, with the consent of the learned counsel for the parties, the matter was listed in chamber on 26th March, 1999 for admission of the petition and appropriate order on the application for vacating the interim order dated 1st February, 1999. It may be mentioned that in the meantime opposite party Nos. 1 and 2 filed supplementary counter-affidavit and the petitioner has filed replies to the counter-affidavit, supplementary counter-affidavit and the application for vacating the stay. 

3. The learned counsel for the opposite party Nos. 1 and 2 has submitted that the petition purporting to have been filed under section 107 itself is not maintainable in as much as issuance of further equity shares does not amount to variation of the right or rights of shareholders within the meaning of section 106 of the Act. He has further contended that as a matter of fact, 80,500 equity shares of Rs. 10 each has been issued by the Board of directors pursuant to the resolution adopted at an extraordinary meeting of the members held on 10th November, 1998, to the son and heir of one late B. K. Jain, former director of the company, who had given an unsecured loan of Rs. 8.5 lakh. As the company was not in a position to repay that loan, at a meeting of the Board of directors held on 10th October, 1998 it has been decided to issue equity shares to his son Sanjay Jain worth Rs. 8.5 lakh. Information of allotment of such shares was given to the Registrar of the Companies-opposite party No. 3 in due course and entered into the book. It has further been contended on behalf of opposite party Nos. 1 and 2 that, as a matter of fact, Mr. D. P. Kharia, father of the present petitioner, was a party to the decision taken by the Board of directors on 10th October, 1998, as he had acted as the chairman at the meeting. Therefore, it has been contended that the main petition barred by limitation having been filed much after 21 days from the date of allotment of the shares to Sanjay Jain. Therefore, the petition is fit to be dismissed. On the other hand, the learned counsel for the petitioner has submitted that the equity shares worth Rs. 8,05,000 were allotted to an outsider depriving him of his right to receive proportionate share therein in terms of section 81 (1) of the Act. Therefore, it has materially varied and affected his right to manage the affairs of the company. In the reply to the counter-affidavit, it has been stated that earlier the petitioner and other members of his family had 49 per cent of the total shares but by surreptitiously increasing the number of the equity shares and allotting the same to Sanjay Jain and subsequently purchasing them from him, the percentage of share of opposite party No. 2 and other members of his family has considerably increased from 47 per cent. Thus, the balance of power has now tilted in favour of opposite party No. 2 and members of his family. 

4. It is well settled that a variation which affects the enjoyment of right, without modifying the right itself, is not a variation within the meaning of section 106. Increase in the number of shares of any kind/category for raising capital or otherwise, though affects the voting power of existing members by diminishing it in number, in no way amounts to variation of their right as envisaged by section 106. It has been held by a Single Judge of the Karnataka High Court in the case of State of Karnataka v. Mysore Coffee Curing Works Ltd. [1984] 55 Comp Cas 55 at p. 70 that sections 106 and section 107 provided for a particular class of shareholders to move the court whenever the rights attached to that class of shares were sought to be altered by the company, and in no other circumstances. The rights attached to ordinary equity shares include a right to vote, right to receive dividends, right to maintain its face-value, and right to transfer freely without restriction the shares to another. Unless such rights are altered or varied by the company by the resolution of the shareholders in accordance with the provisions of section 106, no action lies under section 107. Merely because the company decided by a resolution or otherwise to increase the number of its capital share within the limit of authorised capital and thereby the voting power of the existing shareholders is diminished, it does not amount to variation of the rights of the shareholders as envisaged under section 106. In this connection, article 17 of the articles of association of the companies (annex. 2/A) is very pertinent. According to this article, the rights conferred upon shareholders of any class issued with preferred or other rights shall not, unless otherwise expressly provided by the terms of the issue of the shares of that class, be deemed to be varied by the creation or issue of further shares ranking pari passu therewith. In the present case, what the opposite party No. 1 is alleged to have done is that by special resolution dated 10th November, 1998 passed at an extraordinary meeting of its members decided to issue 80,500 equity shares in favour of one Sanjay Jain, whose father late B. K. Jain had earlier advanced an unsecured loan to the company as one of its directors and pursuant to that resolution by their resolution dated 18th November, 1998, the Board of directors of the company allotted that much of equity shares in lieu of the unsecured loan of Rs. 8.5 lakh which the company owed to the father of the allottee. 

5. The learned counsel for the petitioner has, however, urged that such allotment was contrary to the provisions of section 81. Sub-section (1) of section 81, no doubt, provides that if at any time after expiry of two years from the date of formation of the company or at any time after expiry of one year from allotment of shares in that company made for the first time after its formation, whichever is earlier, it is proposed to increase the subscribed capital of the company by allotment of further shares; such further shares shall be offered to the persons who at the date of the offer are holders of equity shares of the company in proportion to the capital paid-up on those shares on that date. However, sub-section (1A) of the said section permits allotment of further shares to any person, whether or not those persons include person referred to in sub-section (1) in any manner whatsoever, if a special resolution to that effect is passed by the company in a general meeting. 

6. In the present case, the contention of opposite party Nos. 1 and 2 is that 80,500 equity shares of Rs. 10 each had been allotted to Sanjay Jain pursuant to special resolution adopted at the general meeting of the company on 10th November, 1998. Therefore, it was perfectly valid. In spite of notice/knowledge, the petitioner chose not to participate in that meeting which was incidentally held on the same day when the annual general meeting of the company had been held after due notice to the shareholders. The decision to allot equity shares to Sanjay Jain had been taken at a meeting of the Board of directors on 10th October, 1998 presided over by the father of the petitioner himself. Documents annexed with the counter-affidavit support this contention of opposite party Nos. 1 and 2. At the time of hearing, the learned counsel for the petitioner disputed the correctness of the copy of the resolution which has been annexed with the counter-affidavit. Therefore, on my direction, the original books' containing the minutes of the proceedings of the general body of the company as also of the Board of directors thereof together with the attendance book showing the attendance of the directors and members who attended those meetings were produced. On their perusal, I find that actually such resolutions were passed and the meeting of the Board of directors held on 10th October, 1998 had been presided over by the father of the petitioner. 

7. At one stage, the learned counsel for the petitioner also disputed the existence of the alleged unsecured loan in lieu of which 80,500 equity shares were allotted to Sanjay Jain on 18th November, 1998. However, annexure D to the supplementary counter-affidavit discloses the existence of such unsecured loan. The document is a projected balance-sheet, furnished before the Board for Industrial and Finance Reconstruction (hereinafter 'the BIFR') when the company went to the BIFR sometime in 1994. It means that there are unimpeachable documents to show that the company owed to its ex-director B. K. Jain a sum of Rs. 8.5 lakh on account of unsecured loan. 

8. The learned counsel for the petitioner also contended that even if it is accepted that 80,500 equity shares were allotted to Sanjay Jain in view of special resolution of the company, such resolution could not have been given effect to unless approved by the BIFR in view of the fact that the company was under rehabilitation scheme of the BIFR. My attention was drawn to clause (b) of sub-section (2) of section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter 'the SICA') according to which no resolution passed at any meeting of the shareholders of a company shall be given effect to unless approved by the BIFR when management of that company is taken over or changed in course of implementation of the sanctioned scheme for its rehabilitation. It is manifest that such rider is applicable only on resolutions of a company whose management is either taken over or changed under the scheme sanctioned by the BIFR under section 18 of the SICA. Sub-section (1) of section 18 enumerates the scheme/schemes which an operating agency appointed by the BIFR can prepare for sanction by the latter, and they include, inter alia,

(a) reconstruction, revival or rehabilitation of the sick industrial company, and

(b) proper management of the sick industrial company by change in, or takeover of, management of the sick industrial company. If the scheme so prepared and sanctioned is for reconstruction, revival or rehabilitation only of the company without change in, or takeover of, the management thereof, the restriction imposed by clause (b) of sub-section (2) of section 22 of the SICA is not applicable. In the instant case, what is stated is that for the rehabilitation of opposite party No. 1, a scheme sanctioned by the BIFR is under implementation. There is nothing to suggest that for that purpose its management has also been changed or taken over. Therefore, for giving effect to the resolution dated 10th November, 1998 of opposite party No. 1 for enhancing the paid-up capital by Rs. 8,05,000 by issuing 80,500 equity share and allotting the same to Sanjay Jain, approval of one BIFR was not required. Therefore, on no account, the increase in the paid-up capital of the company by issuance of 80,500 equity shares in favour of Sanjay Jain can be said to be illegal or violative of either the constitution of the company or the provisions of the Act or of the SICA. 

9. In view of what I have discussed above, I find that the present petition is not maintainable and is fit to be dismissed in limine. Apart from the fact that the present petition is not maintainable for the reasons stated above, I find that the conduct of the petitioner in approaching this court under the provisions of the Act is not bona fide. In his reply to the counter-affidavit of the opposite party Nos. 1 and 2, the petitioner has himself admitted that earlier his father D. P. Kharia had instituted Title Suit No. 96 of 1998 in the District Court at Jamshedpur challenging the allotment of shares to Sanjay Jain and sought an injunction restraining opposite party No. 2 from giving effect to such increase in the equity shares and allotment thereof. On notice, the defendants in the suit including the present opposite party No. 2 appeared and contested his prayer with the result that the prayer for injunction was not granted by the trial court in that suit. It was thereafter that the petitioner came to this court suppressing this material fact in the original petition and obtained the order of stay. In the original petition as well as in his rejoinders the petitioner has also tried to convey an impression that everything respecting that transaction was done behind his back without knowledge thereof to him. It has been contended that simply because his father was the chairman at the meeting of the Board of directors held on 10th October, 1998 and resides with him in the same building, no knowledge of such transaction can be imputed to him. Thereby the petitioner purports to say that he had nothing to do with the affairs of his father and vice versa. However, in para 10, he has tried to claim majority of paid-up issued shares prior to the increase and allotment of 18th November, 1998 on the ground that he and other members of his family held 49 per cent of the shares issued prior to 10th November, 1998. The very fact that he has tried to club his interest with the interest of other members of his family shows that all the members of his family including the petitioner and his father are hand in glove and the present petition has been filed only with a view to obstruct raising of further capital as proposed by the Board of directors as per notice dated 16th December, 1998 in view of the decision taken at a joint meeting of the managing director of the BSFC, the Director of Industries, Government of Bihar, and others on 3rd December, 1998 for consideration of the rehabilitation package in terms of the order of the BIFR (annex. E). According to this decision, the company was required to raise the equity worth Rs. 5 lakh each year out of which equity worth Rs. 1.25 lakh was to be raised during the current financial year ending in March 1999. 

10. In the result, this company petition is dismissed and interim stay granted on 2nd February, 1999 stands vacated.