Acts of Directors-case study

Shares are allotted in a company under private placement. Later, it was found that the Directors who made it did not have qualification shares (or had not paid due calls) for which Articles of Association of the company provides for. Will such allotment become invalid?

Section 283 (1)(a) of the Companies Act, 1956 provides that if a Director fails to obtain qualification shares (as required by the Articles of Association of the company) within the time stipulated by Section 270, the office of the Director shall become vacant. Thus not holding qualification shares or not paying due calls are disqualification to Directors, leading to vacation of his office after two months in the case of qualification shares and six months of call. But Section 290 of the Act validates the Acts of a Director. That Section reads as “Acts done by a Director shall be valid, notwithstanding that it may afterwards be discovered that his appointment was invalid by reason of any defect or disqualification or in the Articles. Thus, if the disqualification of Directors is brought to light later on, it does not invalidate the Acts of the Directors.

Hence in this case, the allotment of shares does not become invalid.

By virtue of Section 273 of the Companies Act, 1956, Section 270 and 272 are not applicable to a private Limited company.