Veena Solanki and Ors v. Karuna Singh and Ors

What happened

Respondents 1 to 4 sued in CS(OS) No. 1611/2005 (later CS No. 206231/2016) over their claim to the equity shareholding and management of Moral Properties (Pvt.) Ltd. and its land at Village Chhawla, New Delhi. On 29 November 2005 the Court restrained the defendants from selling, alienating, mortgaging, creating third-party interest in or parting with possession of the movable and immovable assets of the company. On 28 June 2017 the board resolved to allot 964 fresh shares: 737 to Veena Solanki, 27 to Om Wati, 100 to Eti Solanki and 100 to S. S. Jauhar, and filed Form PAS-3. Before that, the company had 36 issued shares, 35 held by appellant 1 and one by appellant 2; afterwards it had 1,000, with appellant 1 holding 772. The respondents applied under Order XXXIX Rule 2A read with section 151 CPC, which the Additional District Judge-03, South District, Saket allowed in M. No. 72/2018. The appeal was filed under Order 43 Rule 1. The appellants said a shareholder has no interest in company assets (citing Bacha F. Guzdar v. CIT), that allotment was for working capital, and that appellant 1 still held a majority.

Questions before the court

• Did allotting 964 new shares during the restraint order amount to disobedience, and was restoration of the earlier shareholding justified?

Why the court ruled this way

A shareholder acquires no right, title or interest in the property of the company, but the question was not whether company assets were transferred; it was whether, given the dispute and the restraint, the existing shareholding structure could be altered (paragraphs 14 and 15). The suit concerned the shareholding and management of the company, so the effect had to be tested against the pending proceedings (paragraph 16). The allotment lifted capital from 36 to 1,000 shares and gave shareholding to persons who had none, so it was not a mere change in internal records but created new rights (paragraph 17). That appellant 1 kept a majority did not help, because the position that formed part of the dispute was altered (paragraph 18). A regulatory or working-capital need did not justify the course; if there was doubt, the appellants should have sought clarification or modification of the order (paragraph 19). New shareholders acquired enforceable rights as shareholders and diluted the existing holdings, so third-party rights were created (paragraph 23). The direction to restore the earlier shareholding was consequential to the finding of disobedience and needed to protect the other parties' rights during the suit (paragraph 24).

Controlling point

The impugned allotment violated the restraint order, and restoring the pre-allotment shareholding was justified.

Order and next steps

The appeal was dismissed and pending applications were disposed of.

Practical implications

A company party to a suit over its shares or management should not issue or transfer shares while an order restraining third-party interests is in force, and should seek clarification of the order before any allotment.

Limits of this ruling

• The ruling applies to a restraint order tied to a pending dispute over the shareholding itself; it does not hold that every share allotment during litigation is a breach.