INDUSTRIAL DEVELOPMENT BANK OF INDIA Vs. B ANANTHASWAMI

JUDGEMENT

(1.) 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 under section 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 petitions may be delineated as follows : On March 15, 1974, the first respondent applied under the Capital Issues (Control) Act, 1947 (XXIX of 1947), for 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 :

(2.) 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 forth 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 reasonings 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 : /PARA> <PARA>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 under section 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 :" /PARA> <PARA>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, 351, 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 & Co. v. Calcutta Stock Exchange Association Ltd. Sarkar J., after adverting to the dictum of Farwell L.J., in the above decision, laid down as follows :" /PARA> <PARA>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 share capital to a particular person. We find no reason why the word ' allotment ' in section 75 should have a different sense.