Page 203 - DCOM404_CORPORATE_LEGAL_FRAMEWORK

Corporate Legal Framework

Notes Meaning of Allotment

Offer for shares are made on application forms supplied by the company. When an application
is accepted, it amounts to an allotment. The expression allotment is not defined under the

Companies Act. It means and implies a division of the share capital into defined shares of a
particular value or of different classes and assignment of such shares to different persons. The
supreme Court in Sri Gopal Jalan and Co. v. Calcutta Stock Exchange Association Ltd. AIR 1964 SC

250 defined allotment as “the appropriation but out of the previously unappropriated capital of
the company of a certain number of shares to a person”.
Since re-issue of forfeited shares does not constitute appropriation out of unappropirated capital,
it does not constitute allotment.
What is termed ‘allotment’ is generally neither more nor less than the acceptance by the company
of the offer to take shares.

General principles regarding allotment

With regard to the allotment of shares the following general principles should be observed in
addition to the provisions of the Companies Act.
Allotted by Proper authority – The allotment should be made proper authority i.e., the Board of
Directors of the company or a Committee authorized to allot shares on behalf of the Board. An
allotment made without proper authority will be invalid.
In P.V. Damodara Redy v. Indian National Agencies Ltd. [1945] 15 Comp. Cas. 148 (Mad.), R & N
applied to the company for allotment of shares. Their application was considered by the Board
and accepted and their names entered in the register of members. The Articles of the company
however provided that the shares could not be allotted to outsiders without the consent of the
company in general meeting. Eight months later, on the objection of the Auditor, the allotment
was cancelled and the names of R & N removed from the register. The contention of the company
was that acceptance of the applicants’ offers by the directors alone was entirely inoperative and
accordingly there were no allotments and that the applicants must be deemed to have contracted
on the footing of the Articles of Association.
Held that, applying the rule laid down in Royal British Bank v. Turquand [1856] 6 E & B 37,
applicants were entitled to assume that the directors were acting regularly and that the sanction
of the company in general meeting had in fact been obtained. That being so, the allotments could
not be avoided by the company.
However, allotment of shares in a company made by an irregularly constituted Board of directors
shall prima facie be invalid.
Allotment against application only – No valid allotment can be made on an oral request. Section
41 provides that for becoming a member, a person should agree in writing. Thus, no allotment can
be made without a written application for allotment [H.H. Manabendra Shah v. Offi cial Liquidator
[1977] 47 Comp. Cas. 356. In practice, application is to be made on the form supplied by the
company in this regard.

Where there was no application in writing for allotment of shares and allotment was made in
blank, a company was rightly directed by the Special court of return money paid for the shares.
Rahul Subodh Windoors Ltd. v. A.K. Menon [1999] 96 Comp. Cas. 579 [SC].

Allotment not to be in contravention of any other law – If shares are issued in a manner prohibited
by foreign exchange regulations, the issue would be invalid and void and confer on the allottee
no title whatsoever to the shares.

198 LOVELY PROFESSIONAL UNIVERSITY