RAJIV NAG v. QUALITY ASSURANCE INSTITUTE (INDIA) LTD. (2001)105 CompCas 178

Estimated Reading Time: 11 minutes

This case[1] deals with the challenge of the order passed by the Company Law Board where the appellant’s petition which was filed under Section 113(3)[2] of the Companies Act, 1956[3] got dismissed.

FACTS OF THE CASE

 The appellant was a shareholder in the respondent-company named Quality Assurance Institute (India) Ltd. He held 5,000 equity shares of the respondent-company. In the notice for the sixth annual general meeting (AGM) of the shareholders of the company held on 30-9-1999, the following was included as item No. 8 of the agenda:

“To consider and, if thought fit, to pass, with or without modification, the following resolution as a special resolution :

Resolved that pursuant to the recommendation of the board of directors and Article 133 of the Articles of Association of the company, and part of the sums standing to the credit of the company’s general reserve be capitalized and such be applied in terms of Articles 133 and 134 of the Articles of Association of the company, for paying up in full at par equity shares of Rs. 10 each in the capital of the company to be allotted and distributed as fully paid bonus shares to such members holding equity shares as per the register of equity shareholders at date determined by the board of directors of the company, who are the holders as on the aforesaid date of the existing equity shares of the company fully paid-up in proportion to such number as the board of directors may decide for one existing fully paid equity share held by such member as on the aforesaid date upon the footing that they become entitled to such new equity shares as capital and not as income.”

 In accordance with the provisions of Section 173(2)[4] of the Companies Act, 1956, an explanatory statement was annexed to the above mentioned notice, which talked about the equity share capital as well as the reserves of the company at March 31, 1999.

In view of the excellent working of the company, it is planned to reward the existing shareholders by way of issue of bonus shares in such ratio as the board of directors may deem fit. None of the directors are concerned or interested in the resolution except to the extent of their shareholding.”

The above mentioned resolution was passed at the annual general meeting on 30-9-1999, without any modification. Subsequently, based on the resolution passed at the annual general meeting, the board of directors of the company at its meeting held on 14-1-2000, passed the following resolution :

“Resolved that equity shares be allotted and distributed as fully paid-up bonus shares to the members holding equity shares as per the register of members as on February 1, 2000, who are the holders as on February 1, 2000 of the existing fully paid equity shares of the company, in the ratio of two bonus shares for one existing fully paid-up equity share held by the members as on February 1, 2000, upon the footing that they become entitled to such new equity shares as capital and not as income.”

In the meanwhile, the appellant had sold all his shares in the respondent-company to one Rajesh Naik and his wife, Sapna Kishore, on 25-10-1999, and the transfer deeds were executed on 30-10-1999. When the appellant did not receive any bonus share certificate pursuant to the special resolution passed at the AGM on 30-9-1999, he sent a notice dated 21-3-2000, requesting the respondent-company to deliver the bonus share certificates within ten days. But the company did not deliver them. Thereupon, the appellant filed the petition under Section 113(3) of the Companies Act before the CLB praying for a direction to the respondent-company to deliver 10,000 bonus shares to the appellant.

 The respondent-company filed a reply to the petition and opposed the prayer of the appellant. According to the respondent-company, the AGM of the company held on 30-9-1999, resolved to allot and distribute bonus shares to such members holding equity shares as per the register of equity shareholders at a date determined by the board of directors of the company, who are the holders, as on the aforesaid date of the existing equity shares of the company fully paid-up. The AGM issued the mandate to the board of directors to allot bonus shares in such ratio and on a date they may think fit and appropriate. In terms of the said mandate, the board of directors in its meeting held on 14-1-2000, passed the resolution deciding to allot bonus shares in the ratio of two bonus shares for one equity share held as on 1-2-2000. The appellant had admittedly sold all his shares for a valuable consideration on 25-10-1999, and executed transfer deeds on 30-10-1999. On the request of the transferees, the board of directors registered the said shares in the name of the transferees. Therefore, the appellant’s name was not appearing in the register of members on 1-2-2000, which was the cut-off date. The resolution passed by the AGM on 30-9-1999, did not state that the shareholders whose names appeared in the register of equity shareholders as on the date of AGM were entitled to bonus shares. Hence, the appellant had no right to get the bonus shares and no right of the appellant to get bonus shares had crystallised on 30-9-1999. It was contended by the respondent that the appellant’s petition under Section 113(3) of the Companies Act was not maintainable.

 After considering in detail the various contentions of the parties, the CLB upheld the stand of the respondent and dismissed the appellant’s petition. The CLB also found force in the contention of the learned counsel for the respondent that the petition was liable to be dismissed for non-joinder of necessary parties as the appellant had not impleaded the transferees of the shares even though the bonus shares claimed by the appellant had already been issued to the said transferees.

The appellant does not dispute the facts stated above. The only contention urged by the appellant is that as per the explanatory statement annexed to the notice for the AGM the proposal was “to reward the existing shareholders by way of issue of bonus shares in such ratio as the board of directors may deem fit”, that the said proposal was accepted by the AGM on 30-9-1999, and hence that the members who held equity shares of the company as on 30-9-1999, were entitled to bonus shares. But there is no merit in the said contention of the learned counsel for the appellant. The explanatory statement is not to be read in isolation.

ISSUE

  1. Whether the appellant was entitled to allotment and distribution of bonus shares in his favor on the basis of the special resolution passed at the AGM of the respondent-company held on 30-09-1999?

CONTENTION OF THE PARTIES

Contention of the applicant:-

The applicant contended that s per the explanatory statement annexed to the notice for the AGM the proposal was “to reward the existing shareholders by way of issue of bonus shares in such ratio as the board of directors may deem fit”, that the said proposal was accepted by the AGM on 30-9-1999, and hence that the members who held equity shares of the company as on 30-9-1999, were entitled to bonus shares. 

The applicant also, though feebly contended that  the explanatory statement was inconsistent with the resolution included as item No. 8 in the notice for the AGM.

GROUNDS TAKEN

  • Section 113(3)[5] of the Companies Act,1956:-

 Section 113[6] of the Companies Act:-

  •  Every company, unless prohibited by any provision of law or of any order of any court, tribunal or other authority, shall, within three months after the allotment of any of its shares, debentures or debenture stock, and within two months after the application for the registration of the transfer of any such shares, debentures or debenture stock, deliver, in accordance with the procedure laid down in Section 53, the certificates of all shares, debentures and certificates of debenture stocks allotted or transferred:

 Provided that the Company Law Board may, on an application being made to it in this behalf by the company, extend any of the periods within which the certificates of all debentures and debenture stocks allotted or transferred shall be delivered under this sub- section, to a further period not exceeding nine months, if it is satisfied that it is not possible for the company to deliver such certificates within the said periods.

The expression” transfer”, for the purposes of this sub- section, means a transfer duly stamped and otherwise valid, and does not include any transfer which the company is for any reason entitled to refuse to register and does not register.

  • If default is made in complying with sub- section (1), the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five hundred rupees for every day during which the default continues.
  • If any company on which a notice- has been served requiring it to make good any default in complying with the provisions of sub- section (1)[7], fails to make good the default within ten days after the service of the notice, the Company Law Board may, on the application of the person entitled to have the certificates or the debentures delivered to him, make an order directing the company and any officer of the company to make good the default within such time as may be specified in the order; and any such order may provide that all costs of and incidental to the application shall be borne by the company or by any officer of the company responsible for the default.
  •  Notwithstanding anything contained in sub- section (1), where the securities are dealt with in a depository, the company shall intimate the details of allotment of securities to depository immediately on allotment of such securities.
  • Section 173(2)[8] of the Companies Act, 1956:-

  Section 173[9] of the Companies Act, 1956:-

 Explanatory statement to be annexed to notice.

  •  For the purposes of this section,–
  •  in the case of an annual general meeting, all business to be transacted at the meeting shall be deemed special, with the exception of business relating to
  • the consideration of the accounts, balance sheet and the reports of the Board of directors and auditors,
  • the declaration of a dividend,
  • the appointment of directors in the place of those retiring, and

(iv) the appointment of, and the fixing of the remuneration of, the auditors; and

  • in the case of any other meeting, all business shall be deemed special.
  •  Where any items of business to be transacted at the meeting are deemed to be special as aforesaid, there shall be annexed to the notice of the meeting a statement setting out all material facts concerning each such item of business, including in particular the nature of the concern or interest, if any, therein, of every director, the managing agent, if any, the secretaries and treasurers, if any, and the manager, if any:

 Provided that where any item of special business as aforesaid to be transacted at a meeting of the company relates to, or affects, any other company, the extent of shareholding interest in that other company of every director, the managing agent, if any, the secretaries and treasurers, if any, and the manager, if any, of the first- mentioned company shall also be set out in the statement if the extent of such shareholding interest is not less than twenty per cent. of the paid- up share capital of that other company.

  •  Where any item of business consists of the according of approval to any document by the meeting, the time and place where the document can be inspected shall be specified in the statement aforesaid.

DECISION

In this case, the Court after taking every point into consideration stated that:-

“So long as the explanatory statement did not say that the company planned to reward the existing shareholders as on the date of the AGM[10], I do not find any inconsistency or contradiction between the resolution and the explanatory statement. No date for giving effect to the decision to allot bonus shares was mentioned in the explanatory statement. At the same time, it was specifically stated in the resolution that the bonus shares would be allotted and distributed to such members who would be holding equity shares as on a date determined by the board of directors of the company. If the explanatory statement is read along with the resolution, there is neither ambiguity nor confusion nor contradiction nor inconsistency with regard to the members entitled to bonus shares. It cannot be said that the explanatory statement was tricky or misleading or lacking in material particulars. In this context, it has to be noted that, as pointed in the impugned order by the CLB, neither in the petition filed before the CLB nor in the oral submissions, the appellant had raised any plea that the notice for the annual general meeting was tricky or misleading or lacking in material particulars or that the appellant was misled by the explanatory statement. On the other hand, the appellant’s case before the CLB was that the notice for the AGM was deliberately not sent to him to keep him in the dark about the special resolution and consequently he was not aware of the annual general meeting to be held. As pointed out by the CLB, the appellant was relying upon the special resolution adopted at the AGM for claiming 10,000 bonus shares”.

Therefore, Court after stating this point and taking into consideration gave its judgement in consonance with the Company Law Board and stated that the appellant was not entitled to allotment and distribution of bonus shares in his favor on the basis of the special resolution passed at the AGM of the respondent-company held on 30-09-1999. Hence, the appeal got dismissed by the Delhi High Court.

ANALYSIS

This case was epic judgement on the stance where the shareholder tried to take advantage of the loophole available in the form of explanatory statement where the date for giving effect to the decision to allot the bonus shares was not mentioned and using this, he tried to take advantage of getting the bonus shares even after selling his shares of this company ( respondent-company) in October 1999. The petitioner contended that according to the explanatory statement which was annexed with the notice for the AGM, the proposal was for rewarding the existing shareholders by issuing the bonus shares in such ratio, which the board of directors may deem fit, and as that proposal was accepted on 30th September 1999 by the AGM, therefore, the members who held equity shares on that day of the company were entitled for the bonus share, but Court stated it very clearly that the explanatory statement was attached with the special resolution, so the explanatory statement cannot be read alone and after reading the special resolution, which states that this would be given to the ones who would be holding the shares at a date determined by the Board of Directors and that date was 01-02-2000, on which the petitioner was not having its shares with him as he already transferred those to the third party in October 1999. Considering the very clear fact, which itself was telling the story and the decision of the case, the Court decided the case in the favor of the respondent company and upheld the decision of Company Law Board.

CONCLUSION

This case is a proper example of the statement that “ you cannot take advantage of the wrong you committed”. Here, the company was very clear in its words in the special resolution regarding the bonus share and the wrong was committed by the petitioner who even after selling his shares in October 1999, came to the Court asking for the bonus share where he already lost the rights to take it after selling his shares. Therefore, the Delhi High Court after taking the facts and the documents of this case into consideration gave a remarkable judgement in the favour of justice.


[1] Rajiv Nag  v. Quality Assurance Institute (India) Ltd. , 2001 105 CompCas 178.

[2] The Companies Act, 1956, s. 113(3).

[3] The Companies Act, 1956 (Act No. 1 of 1956).

[4] The Companies Act, 1956, s. 173(2).

[5] The Companies Act, 1956, s. 113(3).

[6] The Companies Act, 1956, s. 113.

[7] The Companies Act, 1956, s. 113(1).

[8] The Companies Act, 1956, s. 173(2).

[9] The Companies Act, 1956, s. 173.

[10] Annual General Meeting

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