An allotment is irregular if it is made without complying with the conditions precedent to a regular allotment as discussed above, viz, the provisions of Section 69 and 70 of the Act.
Consequences of irregular allotment depend upon the nature of irregularity involved. These may be noted as follows:
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Failure to deliver a copy of the prospectus to the Registrar before its issue — In case an allotment has been made without delivering to the Registrar of Companies, a copy of the prospectus along with other specified documents either before or on the date of its issue, the company and every person who is knowingly a party to the issue of the prospectus shall be punishable with fine which may extend to Rs. 50,000 [Section 60(5)]. The allotment, however, shall remain valid.
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Non-compliance with provisions of Section 69 and Section 70 — In the event of non-compliance with the provisions of Section 69 and Section 70 (viz allotment without raising minimum subscripttion or without either collecting application money or collecting less than 5 percent as application money or failure to deliver a copy of statement in lieu of prospectus at least three days before allotment), the following consequences shall follow:
The allotment is rendered voidable at the option of the applicant. The option must however be exercised —
within 2 months after the holding of the statutory meeting of the company and not later; or
where the company is not required to hold a statutory meeting, or where the allotment is made after the holding of the statutory meeting, within 2 months after the date of allotment and not later.
The irregular allotment is voidable even if the company is in the course of being wound up.
Any director who has knowledge of the fact of the irregular allotment of shares shall be liable to compensate the company and the allottee respectively for any loss, damages or costs which the company or the allottee may have sustained or incurred thereby. Proceedings to recover any such loss, damages or costs cannot be commenced after the expiration of 2 years from the date of allotment.
Rectification by company of irregular allotment
An irregular allotment of shares made by the directors in excess of their powers may be subsequently ratified by the shareholders at a general meeting [Bamford v. Bamford, (1969) 39 Com Cases 369].
Lapse of application on undue delay in allotment
An application to take shares lapses if allotment is delayed unreasonably [Ramsgate Victoria Hotel v. Montefiore (1866) LR 1 Ex 109 (C Ex)].
Cases where applicant cannot avoid allotment
We had noted earlier, that an allottee can avoid the allotment within the time frame mentioned in Section 71(1) of the Companies Act. However, the applicant cannot avoid the allotment if he unequivocally affirms the allotment (1) by endeavoring to sell the shares, [Ex. P. Briggs 1866 LR 1 Eq 483]; (2) by executing a transfer of the shares [Crawley’s case (1969) LR 4 Ch App 322]; (3) by paying calls or receiving dividends, [Scholey v. Central Railway of Venezuela (1868) LR 9 Eq 266]; (4) by attending and voting at a general meeting in person or by proxy, [Sharpley v. Louth Co. (1876) 2 Ch. 663 (CA)].
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Non-compliance of Section 72 requirements — In case allotment is made in contravention of the provisions of Section 72 (viz, before the beginning of the fifth day from the date of issue of the prospectus), the company and every officer of the company shall be punishable with fine which may extend to Rs. 50,000 [Section 72(3)]. However, allotment in such a case shall be valid.
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Condition as to listing of shares on a stock exchange is not observed — Where the prospectus of a company states that an application has been made for permission for the shares offered thereby to be dealt in one or more recognised stock exchanges, the allotment shall be void, if either the permission has not been applied for or refused or not granted before the expiry of 10 weeks from the date of the closing of the subscripttion list [Section 73(1) and (2)].
In a particular case, a company proposed public issue at a premium and it stated in the prospectus that it had applied for listing of the shares in four recognised stock exchanges. Three of the stock exchanges granted permission for listing after the Central Government had issued orders in this regard. The petitioner contended that the allotment made is void under Section 73 of the Companies Act. The court held that the question of public issue being declared void does not arise as three exchanges had granted listing permission [Smt. Urmila Barutha v. Conventry Spring & Engineering Co. Ltd. and Other (1997) 2 CLJ 48 (Cal)].
However, where an appeal against the decision of any recognised stock exchange refusing permission has been preferred with Securities Appellate Tribunal, under Section 22 of the Securities Contracts (Regulation) Act, 1956 such allotment shall not be void until the dismissal of the appeal [Section 73(1)].
In case of allotment becoming void, the money becomes due to be refunded forthwith and must therefore be repaid.
