Case: Miheer Hemant Mafatlal Vs. Mafatlal Industries Limited

2. The facts giving rise to this appeal lie within a fairly narrow compass. The respondent Company, namely Mafatlal Industries Limited (referred to hereinafter as the said Company) is a Public Limited Company incorporated under the provisions of the Indian Companies Act, 1913. The said Company was incorporated on January 20, 1913. Clause V of the Memorandum of Articles of the said Company, as it stood before the amendment which is challenged in the suit, provided thus:The Authorised Capital of the Company is Rs. 10,00,00,000/divided into 8,00,000 shares of Rs. 125/each with power to increase or decrease the Capital of the Company or to decrease the number of shares or to increase or decrease the face value of the shares in accordance with the Act in force from time to timeArticle 5 of the Articles of Association of the Company, as it stood prior to the disputed amendment, provided, inter alia, as follows:The Authorised Capital of the Company is Rs. 10,00,00,000 (Rupees ten crores) divided into 6,48,000 (six lacst thousand) Equity Shares of Rs. 125 (Rupees one hundred) each and 1,52,000 (One laco thousand) Unclassified Shares of Rs. 125/) each.... (underlining supplied) [herein indicated in italicsEditor]Between 1557 and 1973 the Authorised Capital of the Company was increased on a number of occasions. On each of these occasions the increase was effected by the passing of a Special Resolution amending Article 5 of the Articles of Association of the said Company. The position at the time when the disputed amendments were effected was that ths authorised share capital of the said Company was Rs. 10,00,00,000/(Rupees ten crores) and the actual issued share capital was Rs. 8,10,00,000/consisting of 6,48,000 shares of Rs.. On June 26, 1986 a notice was given by the said Company convening an annual general meeting of the shareholders to be held on August 23, 1986, inter alia, to consider certain resolutions for the amendment of the Memorandum of Association and to increase the authorised capital of the said Company from Rs. 10,00,00,000/. Item 10 of the said notica proposed that an ordinary resolution should be passed providing, inter alia, that each of the existing equity shares of Rs. 125/in the capital of the Company on which the sum of Rs. 125/d into one full Equity share of Rs., upon which the sum of Rs. 100/shall be credited asp and a fractional certificate of Rs. 25/h of an equity share of Rs. 100/, upon which the sum of Rs. 25/shall be credited as. Resolution No. 11 was to the effect that the Authorised Share Capital of the Company should be increased to Rs. 50,00,00,000 divided into 50,00,000 shares of Rs.. Item 12 of the said Notice was as follows:12. To consider and, if thought fit, to pass the following Resolution as an ORDINARY RESOLUTION, with or without modifications:Resolved that the Memorandum of Association of. the Company be and is hereby altered as follows:In Clause V of the Memorandum of Association the figures and words Rs. 10,00,00,000 divided into 8,00,000 shares of Rs. 125 each be substituted by the figures and words Rs. 50,03,00,000 (Rupees fifty crores) divided into 50,00,000 (fifty lacs) Shares of Rs. 100 (Rupees one hundred) eachItem 13 was to consider passing a resolution that the existing Article 5 of the Articles of Association should be deleted. On August 22, 1986 it was decided that no resolution would be proposed at the annual general meeting for deleting Article 5 of the Articles of Association. On August 23, 1986 the Annual General Meeting of the said Company was held and the aforesaid resolutions at item Nos. 10, 11 and 12 were passed as Ordinary Resolutions. The resolution proposed at item 13 for deleting Article 5 was dropped. On the same day the defendant Company gave notice to the Registrar of Companies setting out that by the aforesaid resolutions the capital of the Company was increased and the changes should be made by the Registrar in accordance with the provisions of Section 97 of the Companies Act. 1956. On September 24, 1986 the present suit No. 2614 of 1986 was filed by the plaintiffs as shareholders holding 26% of the share capital of the said Company in which it was contended that the said resolutions set out in items 10, 11 and 12 of the said notice dated June 26. 1986 were illegal, null and void and not binding. In the said suit the plaintiffs took out the aforesaid Notice of Motion for restraining the defendant Company, namely the said Company from implementing the aforesaid resolutions at items 10. 11 and 12 of the said notice, a copy of which is annexed as Exhibit C to the plaint. This Notice of Motion was dismissed by the learned trial Judge by the impugned judgment and order and the plaintiffs have come in appeal against the said judgment and order.

Court's reasoning:
6. A perusal of the Articles of Association of the said Company shows that there is no article in the Articles of Association referring expressly in terms to the alteration of the Memorandum of Association. The question, however, is whether this leads to the conclusion that there is no provision in the Articles of Association for amending Clause V of the Memorandum of Association as urged by Mr. Parekh. The determination of this question, in our opinion, to a large extent turns on the interpretation of Article 62. Article 62,. as we have pointed out, in terms, provides that the Company may from time to time in its General Meeting increase its share capital by the issue of new shares of such amount as it thinks expedientIn the present case an Ordinary Resolution was passed expressly altering Clause V of the Memorandum of Association to provide for raising the share capital of the said Company to Rs.. In our view there is considerable substance in this submission. It will be noticed that Section 94 of the Companies Act deals with the powers of the limited company to alter its share capital. We have already set out the relevant part ofn (1) of Section 94. A reading of thatn shows that it deals with the question of increase in the share capital of a Company and Clause (a) ofn (1) of that section provides that this can be done by issuing new shares. It is a well settled position in law, and this is not disputed by learned Counsel for the appellant, that the increase of share capital referred to in Section 94 is the increase of authorised share capital. If an authority were required for that purpose, we may refer to the decision of the Rajasthan High Court in The Mahalaxmi Mills Co. Ltd. v. State . It was held in that case that the increase of share capital within the meaning of Section 97(7) takes place by creation of new shares simpliciter and it is not necessary that to amount to such increase the new shares should have been offered, allotted or the names of the shareholders registered in the books of the company. So even though the shares have not been offered or allotted to any one, they are still issued within the meaning of Section 94(7)(a) when they have been created by special resolution of the Company and consequently default in giving a notice to the Registrar as required by Section 97(7) and (2) is punishable undere (5) of the said section. Now, Article 62 in the Articles of Association of the said Company is substantially in pan materia withn (1) of Section 94 of the Companies Act and provides that the Company may in General Meeting increase its share capital by the issue of new shares. In view of the parity of language, it is, in our view, clear that the share capital referred to in this Article h the authorised share capital of the Company, and not the issued share capital, as was submitted by Mr. Parekh. The similarity in language beween Section 94(1) and Article 62 would clearly lead to the conclusion that what is referred to in Article 62 was the same share capital as referred to inn (1) of Section 94, namely the Authorised Share Capital or the nominal share capital of the Company. In our view, therefore, Article 62 clearly deals with the increase in the Authorised Share Capital of the Company and provides that this can be done by the Company in its General Meeting. This Article, in our view, confers a power on the said Company to amend the capital clause, namely Clause V in its Memorandum of Association and the submission of Mr. Parekh that there is no provision in the Articles of the said Company for amending the said clause must be rejected, We may also mention that if we interpret the expression Share Capital in Article 62 as meaning the Issued Capital, and not Authorised Share Capital, we would render nugatory the provisions of Article 10 which clearly provides that it is open to the Directors to allot the shares which are already created but not allotted, as they may from time to time deem fit. Such an interpretation cannot be given. It is, therefore, not possible to interpret the expression Share Capital in Article 62 as limited to Issued Capital as urged by Mr. ParekhA plain reading of Article 62 shows that the Article does not specify that the increase in the share capital is to be effected by any particular type of Resolution, namely whether this could be done by an Ordinary Resolution or by a Special Resolution. In this connection reference may be made to the observations in Palmers Company Law,d Edition, at page 747 in paragraph. This paragraph is under the Heading Ordinary Resolutions, and the relevant observations run thus:Where it is provided that the company in general meeting may do some act, this means that an ordinary resolution is required to be passed. There is no definition in the Acts of ordinary resolution. It means a resolution which requires a simple majority of the persons who, being present and entitled to vote upon the resolution, do voteWe may also refer to the observation ine on Companies, Volume I in paragraph 15.2, which deals with the topic of Increase of Capital. This observation is very material and runs as follows:Where a company does not by its articles specify the kind of resolution required to increase its capital, it is unnecessary to do more than pass an ordinary resolution. Where a company had no power to increase its capital, it was held that a single special resolution, purporting to make the increase, sufficed, for this in substance effected the alteration of the articles so as to authorize the increaseIn the light of this legal position, in our opinion, as Article 62 does not specify that the power to increase its capital can be exercised by the said Company only by a Special Resolution, it must follow that this power can be exercised by an Ordinary Resolution. It may be mentioned that it was submitted by Mr. Parekh that in view of the provisions of Article 5 and Section 31 we should read Article 62 in such a manner that the increase of the Share Capital referred to therein can only be effected by a Special General Resolution. We see no warrant to do this. As we have already pointed out, there is ample authority to show that, where there is no particular type of Resolution referred to in the Articles of Association as required in order to enable the Company to do any particular act, an Ordinary Resolution to that effect will suffice. Merely because the amendment of Article 5 would require a Special Resolution, it cannot lead to the conclusion that the provisions of Article 62 must be read in such a manner as to so limit the power of the Company to increase the Share Capital that this can be done only by passing a Special Resolution. We may mention that if such an interpretation were given, it would practically render nugatory the provisions of Article 62; because even in the absence of Article 62 if a Special Resolution were passed increasing the Share Capital of the Company it would have the effect of amending Article 5 and duly increasing the Share Capital so that Article 62 would be rendered redundant. It is not possible to give such an interpretation126. It was further held that in this view the company had the power to increase the number of directors beyond the maximum prescribed by Article 109 by an ordinary resolution and consequently special resolution altering Article 109 for the purpose was not required. In our opinion, the submission of Mr. Cooper must be accepted. As we have already pointed out, if Article 5 is to be read as an unqualified limitation on the increase in the Authorised Share Capital of the Company, it becomes inconsistent with the provisions of Article 62, as Article 62 clearly authorises an alteration of the Capital clause by passing an Ordinary Resolution and the two Articles would be textually inconsistent. In view of this, in our opinion, it would be proper to read Article 5 as if the words Subject to the provisions of Article 62 were included at the beginning of that Article or we must read Article 62 as if the words Notwithstanding the provisions of Article 5 were included at the beginning of that Article. This is clearly permissible in view of the aforesaid decision of the Privy Council in Ram Kissendas Dhanuka (supra). In view of this, we do not consider it necessary to go into the correctness of Mr. Coopers contention that Article 5 merely describes the existing state of affairs in respect of the share capital of the said Company and is not intended to act as providing a limit on the amount of Authorised Share Capital. Wd may mention that Mr. Parekh referred to the decision of a learned single Judge of this Court in Navnitlal Chabildas v. The Scindia Steam Navigation Co. Ltd. but fairly conceded that the said decision need not be considered, as it was impliedlythe aforesaid decision of the Privy Council in Ram Kissendas Dhanuka (supra)In our opinion, the aforesaid submission of Mr. Cooper deserves to be accept ed and the limit imposed by Article 5 of the Authorised Share Capital of the said Company must be regarded as nugatory to the extent that it is inconsistent with Clause V of the memorandum, and of no legal effect10. As far as the argument of Mr. Parekh on past practice is concerned, it is not possible to accept the same. In our opinion, the relevant provisions of the Articles are quite clear and permit the increase of the Authorised Capital of the Company by passing of an ordinary Resolution as contemplated by Aricle 62. In view of this, it is not necessary to consider the past practice to arrive at the correct construction of the Articles.