Hasmukhlal Madhavlal Patel & Anr Vs Ambika Food Products Pvt ltd and Ors(Supreme Court)
Date-June 15,2023
Sub- Disproportionate allotment of shares in a right issue by a Private limited Company- Duty of Director- Applicability of Section 81 of the Companies Act, 1956

The Supreme Court in this case was dealing with an interesting situation where the respondent company was controlled by three groups of shareholders who held varying percentage of shares and upon directions of Bank of Baroda it was decided to increase the share capital from Rs 1 crore to Rs 2 crore and right shares were offered to all the shareholders in the ratio of 1:1 with an option to apply and be allotted additional shares to the extent of unsubscribed shares proportionately. Upon such allotment having been made, the shareholding percentage of the appellate group went up substantially in view of non application by the other groups who challenged oppression and mismanagement on various grounds.
The Supreme Court analysed the decision of Dale & Carrington Investment Pvt ltd and another Vs P K Prathapan and others(2005) 1 SCC 212(SC) where it was held that the directors of a private limited company are to be tested on a much finer scale to rule out misuse of power for personal gains or ulterior motives.Non applicability of Section 81 on a private limited company casts a heavier burden on its directors and they cannot be said to have absolute freedom in the matter of management of affairs of the company. The fact that directors also benefit by the decision taken which was otherwise in the interest of the company is permissible but not where the decision is taken only for the purpose of benefitting the close group.
On these facts the decision to allot additional shares in view of non participation by other group was upheld.

This decision though reiterates the principles laid down earlier in Dale & Carrington and Nandlal Zaver, an important decision the way private limited company shares changes hands and will be relevant in the context of income-tax act also particularly Section 56 .

Ramesh Patodia
June 18, 2023.