Effects of irregular allotment of shares

Circumstances when allotment of shares are irregular

Effects of Irregular Allotment of Shares

Image: Effects of Irregular Allotment of Shares

1. An allotment shall be irregular when, it is made by the company

  1. Without receiving the minimum subscription or the application money subject to a minimum of 5% of the nominal value of the share, or
  2. Without filing a statement in lieu of prospectus at least three days before the allotment, if no prospectus is issued.

2. Where an application has been made to Stock Exchange(s) as per Sec. 73 of the Companies Act for the purpose of listing the shares and the permission has not been granted before the expiry of 10 weeks from the date of closing of subscription list the allotment is void.

3. Where the allotment is made before the expiry of the fifth day after the publication of the prospectus, the allotment is valid, but the Company and its officers in default are liable to a fine.

Effects of Irregular allotment of shares

The effects of an irregular allotment of shares can be summarized as follows.

1. Voidable at the option of the Shareholder

An allotment which is not made after complying with the statutory requirements cited above, shall be considered as an invalid allotment and is void. But an irregular allotment is not an invalid allotment or a void allotment. An irregular allotment is only voidable at the instance of the allottee.

2. Time Limit

The option to avoid the allotment should be exercised within two months after the holding of the statutory meeting. In case of allotment by existing companies, the allottee should exercise his option within two months from the date of allotment.

3. Compensation

Every director, who knowingly authorizes the allotment, is liable to the applicant for any loss or damage incurred by him. They should make good the loss incurred by the allottee.

4. Ratification of the Allotment

The allottee alone can avoid the allotment but not the company. If the allottee never avoids the allotment, the company is bound by it as if it is a regular allotment. An irregular allotment made by the directors can also be ratified by the company at a general meeting subsequently

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