GENERAL PRINCIPLES REGARDING ALLOTMENT
With regard to the allotment of shares, the following general principles should be observed in addition to the statutory provisions, discussed hereafter:
- The allotment should be made by proper authority, i.e. the Board Directors of the company, or a committee authorised to allot shares on behalf of the Board. Allotment made without proper authority will be invalid. Allotment of shares made by an irregularly constituted Board of directors shall be invalid [Changa Mal v. Provisional Bank (1914) ILR 36 All 412].
It is necessary that the Board should be duly constituted and should pass a valid resolution of allotment at a valid meeting [Homes District Consolidated Gold Mines Re (1888) 39 Ch D 546 (CA)]. But Section 290 and the Rule in Royal British Bank v. Turquand (1856) 6 E & B 327 : (1843-60) All ER Rep 435 may make an allotment valid even if some defect was there in the appointment of directors but which was subsequently discovered. An allotment by a Board irregularly constituted may be subsequently ratified by a regular Board [Portugese Consolidated Copper Mines, (1889) 42 Ch. D 160 (CA)]. A director who has joined in an allotment to himself will be estopped from alleging the invalidity of the allotment [Yark Tramways Co. v. Willows, (1882) 8 QBD 685 (CA)].
- Allotment of shares must be made within a reasonable time (As per Section 6 of the Indian Contract Act, 1872, an offer must be accepted within a reasonable time). What is reasonable time is a question of fact in each case. An applicant may refuse to take shares if the allotment is made after a long time.
The interval of about 6 months between application and allotment was held unreasonable [Ramsgate Victoria Hotel Company v. Montefione (1866) LR 1 EX 109].
- The allotment should be absolute and unconditional. Shares must be alloted on same terms on which they were applied for and as they are stated in the application for shares. Allotment of shares subject to certain conditions is also not be valid one. For example where an applicant applied for shares on the condition that he will be appointed as branch manager of company but later on the condition was breached, it was held that he is not bound by the allotment of shares [Ramanbhai v. Ghasi Ram (1918) BOM. LR 595].
Similarly, if the number of shares alloted are less than those applied for, it cannot be termed as absolute allotment.
- The allotment must be communicated. As mentioned earlier posting of letter of allotment or allotment advice will be taken as a valid communication even if the letter is lost in transit. In Household Fire And Carriage Accident Insurance Co. Ltd. Grant (1879) 4 E.D. 216, Grant applied for certain shares in a company, the company despatched letter of allotment to him which never reached him. It was held that he was liable for the balance amount due on the shares. The mere entry of a shareholder’s name in the company’s register is insufficient to establish that an allotment was in fact made [Official Liquidator, Bellary Electric Supply Co. v. Kanni Ram Ramwoothmal (1933) 3 Com Cases 45; AIR 1933 Med 320]. There can be no proper allotment of shares unless the applicant has been informed of the allotment [British and American Steam Navigation Co. Re. (1870) LR 10 Eq 659]. A formal allotment is not necessary. It is enough if the applicant is made aware of the allotment. [Universal Banking Corpn. Re. Gunn’s Case (1867) 3 Ch App 40].
- Allotment against application only — No valid allotment can be made on an oral request. Section 41 requires that a person should agree in writing to become a member.
- Allotment should not be in contravention of any other law — If shares are allotted on an application of a minor, the allotment will be void.