Incidental Gain Due To Decision Of Board of Directors To Increase Authorised Capital Cannot Be Termed As Mala Fide- Apex Court

A Supreme Court Bench of Justice KM Joseph and Justice BV Nagarathna has observed that an incidental gain due to the decision of the Board of Directors, such as a change in shareholding due to the refusal of other groups to apply, cannot be categorised as mala fide.

Senior Counsel Meenakshi Arora appeared for the appellants, while Senior Counsel Nitin Rai and Counsel Malak Manish appeared for the respondents.

In this case, the respondents had alleged that the ostensible reason for the appellants increasing the authorized capital and for the allotment of the shares was fraught with the absence of bona fides, and the real intention was to capture controlling interest in the company. Further, the very authority of the Board of Directors to decide upon the further issue of shares was questioned as it involved the offer of shares being made when the authorized capital was Rs.1 Crore only.

On analysing the relevant provisions of the law, the Supreme Court observed that the contents of the last paragraph of the Resolution, made it abundantly clear that the Board of Directors was aware that the power lay with the General Body of shareholders to bring about an increase in the Authorised Capital. In furtherance, the Court noted that the Resolution to allot the shares in 1:1 ratio and the indication that shares, which are not applied for, could be the subject matter of allotment to other shareholders, were all to become operative upon the applications being considered. Further, the Minutes also revealed that the consideration of the application was to await the increase in the Authorised Capital in a duly constituted meeting of the General Body of shareholders. 

With that background, the Court held that "This is not a case where the Resolution was to allot the further shares to the Directors or Members of their Group alone. There is a concurrent finding that the decision to go in for increase in capital, viz., Authorised Capital, was not vulnerable to attack. The decision was based on the advice given by the Bank. The purpose of the Board of Directors to increase the capital has been admittedly found to be bona fide. An incidental gain, namely the change in the shareholding pattern is entirely the inevitable result of the refusal of the respondent’s groups to apply. We cannot proceed on the basis that the appellants foresaw and deliberately planned the whole affair. If only the respondents had applied, the situation would not have happened."

No orders were passed as to costs.

Cause Title: Hasmukhlal Madhavlal Patel & Anr. vs Ambika Food Products Pvt. Ltd. & Ors.

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