A private limited company lies outside the purview of Section 81(3) of the Companies Act, which deals with allotment of shares through a rights issue. Yet, in a case where one set of promoters got a disproportionate allotment of rights shares, the Supreme Court held that regardless of Section 81, the conduct of the Directors must be judged on a “higher yardstick”, even if one set of promoters benefited more than the others.

In the case of allotment of additional shares to promoters in Ambika Food Products Pvt Ltd, the Supreme Court recently held that the decision of the promoters to allot additional shares could not be set aside merely because one set of promoters benefited.

The HM Patel Group, the Sheth Group and the VP Patel Group held 30.80 per cent, 45 per cent and 24.20 percent respectively of the paid-up share capital in the company. When the company applied for a term loan, the Bank of Baroda asked the company to raise its equity capital from ₹1 crore to ₹2 crore.

‘Defective distribution’

The Sheth group and the VP Patel group did not subscribe to the additional share offerings. From a perusal of the SC judgment, it appears that the two groups had loans due to them from the company.

Consequently, the respective stakes changed to 53.58 per cent, 12.74 per cent and 23.68 per cent. On a petition filed by Sheth and VP Patel groups, the NCLT found the distribution of the shares to be “defective”. Following which the HM Patel group approached the Supreme Court.

Justice KM Joseph and Justice BV Nagarathna said in their verdict, “It must be borne in mind that the whole idea was to get funds from the Bank for the expansion of the company. The case of the respondents that there were loans due to them may not advance their case. It would have been different if the respondents had applied and sought adjustment of the consideration by cancelling loans given by them to the company and it was rejected. On the whole, the appellants (HM Patel group) cannot be described as having acted in a defective or in an unfair manner.”