NCLT Bengaluru Cancels Rights Share Allotment In Sha's Airborne Travels, Orders Register Rectification

The National Company Law Tribunal at Bengaluru on 11 February, set aside the allotment of 59,500 equity shares made in favour of a director of Sha's Airborne Travels Pvt Ltd, holding that the increase in authorised share capital and the subsequent rights issue were illegal and void ab initio.

A coram of Judicial Member Sunil Kumar Aggarwal and Technical Member Radhakrishna Sreepada held that the impugned actions were carried out unilaterally and amounted to unilateral dilution of the promoters' shareholding.

The Tribunal held:

“The cumulative facts on record establish that the impugned increase of authorised share capital and allotment of shares are not mere procedural irregularities but go to the root of the matter, rendering the entire exercise ultra vires and void ab initio.”

The promoters and directors of the company approached the NCLT under Section 59 of the Companies Act, 2013, alleging an illegal increase in authorised share capital and fraudulent allotment of 59,500 equity shares in favour of Mohammed Shakir.

According to them, Shakir, who was appointed as a non-executive director in 2018 after promising to bring a Rs. 1 crore investment, failed to infuse the funds. During February–April 2021, when the promoters were dealing with a family emergency and were not actively managing the company, Shakir allegedly fabricated EGM notices, forged their signatures, increased the authorised capital, amended the articles of association, and allotted 59,500 equity shares to himself under the guise of a rights issue.

They contended that Shakir was never a shareholder, no board or general meetings were held, no offer was made to the existing shareholders, and the allotment was in violation of the Companies Act. Claiming that the entire exercise was done to gain control of the company, they sought rectification of the register of members and declaration of the allotment as void ab initio.

Shakir, however, raised an objection on the maintainability of the petition, contending that it involves serious allegations of fraud, forgery, and disputes over title to shares, which require detailed evidence and trial. He argued that such issues fall within the jurisdiction of a competent civil court and cannot be adjudicated by the NCLT.

Referring to the Supreme Court's ruling in Shailja Krishna v. Satora Global Limited, the Tribunal held that the NCLT has wide jurisdiction to adjudicate company law disputes, including matters involving allegations of fraud. Rejecting Shakir's objection, it concluded that the petition was maintainable.

On the issue of whether a rights issue can be made to increase paid-up capital without increasing the authorised capital, the Tribunal held that the articles of association must permit such increase or decrease in the company's capital. It further observed that in the present case, the increase in authorised capital took place after the alleged rights issue, and since there was insufficient authorised capital at the time of allotment, the issue of further shares was void ab initio.

Referring to Section 62 of the Companies Act, the Tribunal emphasised that any issue of further shares must be offered to existing shareholders through an offer letter, granting the statutory offer period, approval of the Board of Directors, and compliance with the articles of association. It held:

“In the absence of compliance with such statutory requirements, the allotment of shares in favour of Respondent No. 2 is in violation of Section 62 and is illegal and void ab initio. The record prima facie indicates that the impugned actions were carried out unilaterally, without the knowledge or consent of the Petitioners, resulting in dilution of their shareholding.”

Accordingly, the Tribunal allowed the petition, set aside the rights shares allotted to Shakir and directed the Register of Members to be rectified by removing his name. It further directed the ROC to take on record the revised shareholding.

For Petitioner: Naman G Joshi PCS

For Respondents: Advocate Mohd.Taher Shaikh