Delhi High Court Upholds Restoration Of Shareholding After 964 Shares Allotted During Restraint Order

The Delhi High Court has upheld an order directing restoration of the shareholding pattern of Moral Properties Private Limited after its Board allotted 964 fresh shares while a restraint order concerning the company's properties was in force.

Justice Manoj Kumar Ohri dismissed an appeal against the order passed by the Additional District Judge, South District, Saket Courts, which found that the allotment violated the restraint order and directed restoration of the earlier shareholding pattern.

The dispute arose from a suit concerning the equity shareholding and management of Moral Properties Private Limited. During the proceedings, the High Court had restrained the parties from selling, alienating, mortgaging, creating third-party interests in or parting with possession of the company's movable and immovable properties.

While the order was in force, the company's board passed a resolution on June 28, 2017, allotting 964 fresh equity shares. Before the allotment, the company had 36 issued shares, of which Veena Solanki held 35 and another shareholder held one.

After the allotment, the issued share capital increased to 1,000 shares. Solanki held 772 shares, while Om Wati held 28, and Eti Solanki and S.S. Jauhar held 100 shares each.

The shareholders challenging the allotment alleged before the trial court that it had altered the existing shareholding structure and introduced new shareholders, creating third-party rights during the restraint.

The appellants argued that shares were the personal property of shareholders and not assets of the company. They contended that the allotment did not involve any sale, alienation or parting with possession of company assets or creation of third-party interests in its properties.

The trial court rejected the argument and held that the allotment had substantially changed the shareholding pattern, diluted the percentage holdings of existing shareholders and introduced new shareholders. It directed restoration of the shareholding pattern as it stood on November 28, 2005.

Before the High Court, the appellants argued that the allotment was made to meet the company's working capital needs and that Solanki continued to hold a majority.

“A substantial increase in the issued share capital from 36 shares to 1000 shares necessarily had the effect of altering the relative shareholding of the existing shareholders. The fact that appellant No.1 continued to hold a majority thereafter cannot, by itself, render such alteration permissible,” The court observed.

The court noted that Eti Solanki and S.S. Jauhar had not been shareholders earlier and each received 100 shares. The allotment therefore created new shareholder rights and changed the legal and factual position existing when the restraint order was passed.

Even if the company had genuine commercial or regulatory reasons for increasing its share capital, the appellants should have sought clarification or modification of the restraint order before proceeding, the court observed.

The subsequent filing of Form PAS-3 with the Registrar of Companies also showed that the allotment had been implemented and the altered share capital formally reported to the statutory authority.

The court found that the allotment was not an inadvertent or technical breach. It followed a formal Board resolution and was subsequently given legal effect through the statutory filing.

It also rejected the argument that no third-party rights were created because the new shareholders acquired shares rather than a direct interest in the company's properties. The allotment gave them enforceable shareholder rights and altered the rights and percentage holdings of the existing shareholders.

Upholding the restoration order, the court observed that restoring the position existing immediately before the violation was necessary to protect the rights of the other parties while the suit remained pending.

The High Court found no error in the trial court's order and dismissed the appeal.

For Appellants: Advocate M Manuj Aggarwal

For Respondents: Advocates Ajit Singh, Aditya Singh and Yashvi Sood