[1950] 20 COMP CAS 296 (ALL.)
HIGH COURT OF
v.
Debi Prasad
MUSHTAQ AHMAD AND DESAI, JJ.
CIVIL REVISIONS NOS. 121 TO 154 OF 1945
FEBRUARY 20, 1950
G.S. Pathak, for the Petitioner.
Mansur Alam and L. Chandra for the
Opposite Party.
Desai, J.—This and Civil Revisions Nos. 122 to 154 of 1945 are applications in revision under Section 25 of the Small Cause Courts Act, against judgments passed by the Small Cause Court Judge, Gorakhpur, in suits filed by the Official Liquidator of the Shiromani Sugar Mills Ltd., Khalilabad, against a number of ex-shareholders of the Shiromani Sugar Mills Ltd., for allotment, first call and second call moneys. There were as many suits as there are revisions; they were all of similar nature and the same disputes were involved in all. They were consolidated by the learned Small Cause Court Judge and tried together. He delivered one judgment dismissing all the suits.
The company, which was a public limited company, was formed with a large number of objects, the first and most important object being "to manufacture in India or abroad all kinds of sugar by up-to-date and latest scientific methods and machinery, and for this purpose to erect and construct a factory or factories at one or several places in or outside India." It was incorporated on 7th November, 1933, on which date the Memorandum of Association and the Articles of Association were registered with the Registrar of Joint Stock Companies. The prospectus was published on 16th October, 1933, and was registered with the Registrar on 26th February, 1934. On 24th November, 1933, a meeting of the promoters of the company unanimously elected the following persons as first directors: (1) Pandit D. P. Pandey, (2) Pandit P. P. Pandey, (3) Pandit S.K. Pandey, (4) Chaudhri Bhagwati Prasad, (5) Mahant Vishwanath Bharthi, (6) Pandit Ganga Narain Tewari, (7) Thakur Saran Singh, (8) Dr. P. C. Bhattacharjee, (9) Mukut Behari Lal, (10) Pandit Tirath Raj Pandey, (11) Sahu Baldeo Prasad, (12) Abdul Qadir Khan, (13) R. D. Sharma, ex officio, and (14) N. K. Varma.
The authorised capital of the Company was fixed at Rs. 20,00,000 dividend into Rs. 15,000 preferred shares of Rs. 100 each and Rs. 50,000 ordinary shares of Rs. 10 each. The earned capital according to the prospectus was Rs. 16,00,000 divided into Rs. 12,000 preference shares and Rs. 40,000 ordinary shares. In most of these revisions we are concerned with only preference shares and I shall deal only with them. Out of Rs. 100, the price of a preference share, Rs. 20 were payable on application for the share, Rs. 30 were payable on the share being allotted and the balance of Rs. 50 were payable in such call or calls as might be decided by the directors from time to time. Under Article 32 of the Articles of Association a share became liable to forfeiture if the call or instalment or allotment money was not paid by the shareholder within the fixed time. The business of the company was to be conducted by managing agents, subject to the control of the directors and Messrs. Sharma, Varma and Company were the first managing agents. The maximum number of directors fixed under Article 172 are 17. The qualification of a director as fixed under Article 156 was "the holding of shares of Rs. 5,000 at least in the capital of the company in his own name and right."
Article 157 provided that "A Director may act as Director before acquiring his qualification but shall in any case acquire the same within two months from his appointment and unless he shall do so he shall be deemed to have agreed to take the said share from the Company and the same shall be forthwith allotted to him accordingly."
The office of a director was vacated under Article 165 on his ceasing to hold the required number of shares or stock to qualify him for office, or on his accepting any other office or place of profit under the company. One-fourth of the number of directors were to retire every year by rotation though they were eligible for re-election. Four directors formed a quorum for a meeting of the directors.
Article 131 laid down that: "All acts done by any committee of Directors or by any person acting as a Director shall, notwithstanding that it be afterwards discovered that there are some defects in appointments of any such directors or persons acting as aforesaid or that they or any of them are disqualified, be as valid as if every such person has been duly appointed and was qualified to be a Director."
The defendants opposite parties were all shareholders of the company. Some of them did not pay even the allotment money and others did not pay the first and second call moneys. Consequently their shares were forfeited through resolutions passed by the directors in three meetings held on 14th June, 1939, 23rd July, 1939, and 16th October, 1939. An order for the winding up of the company was passed on 7th December, 1941. The official liquidator then instituted the suits to recover the balance of the allotment and first and second call moneys.
The suits were contested by the opposite parties. The grounds with which we are concerned in these applications were (1) that the original contract for the purchase of the shares was procured by the promoters of the company by fraudulent misrepresentation, (2) that the promises held out to the opposite parties at the time of the purchase were not carried out by the company and consequently the opposite parties were justified in not making further payment, (3) that the resolutions passed by the directors allotting the shares to the opposite parties were invalid because the directors voting for the resolutions had ceased to be directors and (4) that the resolutions forfeiting the shares also were invalid for the same reason. The learned Judge upheld all these contentions of the opposite parties and dismissed the suits. In these applications the official liquidator challenges the learned Judge's findings on these four points.
As stated by Baggallay, L.J., in In re Scottish Petroleum Co.: "To constitute a binding contract to take shares in a company when such contract is based upon application and allotment, it is necessary that there should be an application by the intending shareholder, an allotment by the directors of the company of the shares applied for, and a communication by the directors to the applicant of the fact of such allotment having been made." The purchase of shares is governed by the same law as the purchase of goods. Every person who has agreed to become a shareholder of a company is liable to pay the price of the share in accordance with the Articles of Association. This proposition, "is subject to the application of the well-recognised rule in equity that a person who has been induced to enter into a contract by the fraudulent conduct of those with whom he has contracted is entitled to rescind such contract provided he does so within a reasonable time after his discovery of the fraud." (Baggallay, L.J., in In re Scottish Petroleum Co.)
Sir G.J. Turner, L.J., observed in In re Reese River Silver Mining Co.: "If it can be shown that a material representation which is not true is contained in the prospectus, or in any document forming the foundation of the contract between the company and the shareholder, and the shareholder comes within a reasonable time, and under proper circumstances, to be released from that contract, the Courts are bound to relieve him from it, and to take his name off any list of shareholders."
The misrepresentation must be of a material fact, the shareholder must have been induced by it and he must plead and prove so.
James, L.J., observed in Eaglesfield v. Marquis of Londonderry that the misrepresentation "must be a misrepresentation of a matter of fact." A shareholder cannot" obtain relief without distinctly alleging and proving that the particular statement was a material inducement to his purchasing his shares ;........the precise misrepresentation must be distinctly stated and also that it formed a material inducement to the plaintiff to take shares in the company." (See Hallows v. Fernie). In that case the plaintiff did not allege and prove that he "read the prospectus in a sense which involved an untruth, that it led him into an erroneous belief of the existence of a certain state of facts, and that this belief was a material inducement to him to become a purchaser of shares in the company," and the Lord Chancellor dismissed his suit. To adopt his Lordship's language, "whatever may be the fair meaning of the prospectus, and even if the plaintiff's construction of it is correct, he can only be entitled to succeed secundum allegata et probata" (page 478).
The learned Judge has relied mainly upon one misrepresentation in the prospectus. It is the sentence, "the managing agents with their friends, promoters and directors have already promised to subscribe shares worth Rs. 6,00,000", printed in red on the cover of the prospectus. The opposite parties did not specifically plead that it is a misrepresentation and that they were induced by it to purchase the shares. There is no proof, and of course there is no finding of the learned Judge, that the managing agents with their friends, promoters and directors had not promised to subscribe to shares worth Rs. 6,00,000. I do not know how this statement could be assailed as a misrepresentation of fact. The only fact asserted was of the existence of promise. Unless it were false, there was no misrepresentation of fact. It was not asserted that the managing agents etc. had subscribed to shares worth Rs. 6,00,000. When it was said that they had only promised, it means that they had not carried out their promise, otherwise the statement would have been that they had already subscribed to shares worth Rs. 6,00,000. Nobody should have been misled by this statement and nobody should have understood it to mean that shares worth six lacs of rupees had already been subscribed to. If the opposite parties misunderstood this statement to mean that the shares had already been subscribed to, and applied for shares under that misapprehension, they are to blame themselves and not the promoters of the company.
In In re Reese River Silver Mining Co., Smith's case the prospectus contained the statement that the property which the company had contracted for consisted of 50 acres of land "containing several very valuable claims, some of which are in full operation, and making large daily returns." No claims were in full operation and the statement to the contrary was false. But it was based on a report received and honestly believed by the directors. Sir G.J. Turner, L.J., held that it was a misrepresentation of fact and observed at page 611: "If the company had confined themselves to saying 'we have received reports from which we believe and have reason to believe, that these mines are in full operation, and are making daily large returns' it might, and no doubt would, have been very difficult for Mr. Smith to be relieved from the contract, but the company, instead of thus referring to the information received, stated the circumstances as facts."
What the directors could have said in that case to avoid their liability was stated by the directors in the present case.
In Hallows v. Fernie the prospectus contained statements that the company would commence operations with six screw steamships of 20,000 tons and 300 h. p., each, and having capacity of 2,000 tons of cargo and that the steamers were guaranteed to steam 10 knots and being full rigged as clipper sailing ships were calculated to perform the voyage regularly from F to R in 25 days. Actually no steamships were in possession of the company when the prospectus was issued and it had not even entered into any contract for obtaining them. So it was contended that the statements were misrepresentations of fact, but the contention was overruled. Lord Chelmsford, L.C. held that the prospectus did not announce to the public in clear and unequivocal language that the promoters of the company actually possessed, or had contracted for the possession of six ships of the description mentioned. His Lordship observed at page 475: "There is a material distinction between the employment of words in a prospectus which can bear only one meaning and of those which are equivocal, and which different persons may interpret differently. In the latter case no prudent person would act upon his own construction without some inquiry. In construing a prospectus, the preliminary character of the document must always be taken into consideration. Every one knows that it is intended to usher a company into existence, and not to describe its actual formation; no one is surprised to find that a future sense must be given to words in the past or present tense which it contains". His Lordship further observed at page 476: "After the elaborate examination of this first part of the prospectus in the argument before me, its meaning cannot be regarded as so entirely free from doubt, that a person has a right, wiihout inquiry, and acting entirely upon his own views of its proper construction, to purchase shares in the company, and then complain that he has been deceived. Because, if the words are susceptible of different meanings, he is deceived not by the words, but by his construction of them."
When there is absence of proof that the managing agents etc. had not made the promise the existence of the promise is not falsified by the breaking of it. The managing agents etc. might not have kept their promise, but the opposite parties are not entitled to say that they were misled by their promising. Every document, as against its author, must be read in the sense which it was intended to convey. As observed by Lord Chelmsford in Peek v. Gurney, a prospectus may contain statements, which are perhaps literally true, yet really false in the sense in which the promoters should know they would be understood by the public. The promoters in the present case could not possibly have intended the impugned statement in the prospectus to mean that shares worth Rs. 6,00,000 had already been subscribed to. Even if it amounted to misrepresentation, there is no proof that it induced the opposite parties to buy the shares. The learned Judge has mentioned that the directors had not paid the application money for the qualification shares. This is immaterial. The directors had two months within which to acquire the qualification shares. If their names were mentioned in the prospectus without their having acquired the qualification shares, it does not mean that it contained a misrepresentation of fact. Even if the directors did not acquire the qualification shares within two months Article 157 of the Articles of Association forced the shares upon them.
It is stated in the prospectus that "our shareholders will be highly and satisfactorily benefited by way of dividend." There is also the evidence of a director to the effect the shareholders were told that the company would start its work of producing sugar very soon. These are not representations of fact. Some amount of puffing must be allowed in a prospectus; it must not amount to a misrepresentation of fact. It is stated in Palmer's Company Law, 19th Edition, page 347: "The statement that something will be done is not a statement of an existing fact so much as a contract or promise. It may, however, imply the existence of facts which are non-existent, or it may be material term in the contract." The statements in question do not imply the existence of facts which were really non-existent and there is no evidence that they formed a material term in the contract.
The learned Special Judge has taken notice of certain nondisclosures in the prospectus. Under Section 93 of the Companies Act a prospectus must state the number of shares fixed by the articles as the qualification of a director, the names and addresses of the vendors of any property purchased or acquired by the company, and the debts of, and parties to, every material contract. The prospectus does not contain this information. But there is no penalty prescribed in the Act for non-compliance with the provisions of Section 93. When the non-compliance involves misstatement of a material fact, there will, of course, be a right of rescission under the general law. But otherwise the omission of any of the particulars will not per se entitle a shareholder to rescission of his contract to take shares. It will not do for the promoters of a company to plead that everything which is stated in the prospectus is literally true; they must be able to meet the objection, "not that it does not state the truth as far as it goes, but that it conceals most material facts with which the public ought to have been made acquainted, the very concealment of which give to the truth which is told the character of falsehood": See Oakes v. Turquand. "Half a truth is no better than a downright falsehood": Gluckstein v. Barnes.
According to Peek v. Gurney, if there is such a partial and fragmentary statement of fact, as that the withholding of that which is not stated makes that which is stated absolutely false, it would form ground for an action for misrepresentation. In Rex v. Kylsant, Avdry, J., held the prospectus to be false because, "the falsehood in this case consisted in putting before intending investors, as material on which they could exercise their judgment as to the position of the company, figures which apparently disclosed the existing position, but in fact hid it."
Judged according to these authorities, the omissions in the present case do not amount to a misrepresentation; what is left out does not make what is stated false.
The learned Judge has gone out of his way in taking into consideration the various acts of breach of rules; if the managing directors and other directors committed any breach of rules, the shareholders may have other remedy against them but not that of rescinding the contract of purchase of shares. They might have acted dishonestly and inefficiently and filed false declarations before the Registrar, but even that would not entitle the shareholders to rescind their contract. The learned Judge has observed that on account of these breaches and acts of dishonesty and inefficiency, the shareholders were justified in withholding further payment of their allotment and call moneys. He has not quoted any authority in support of his view. So long as the contract of purchase of shares is not rescinded, the liability of a shareholder to pay their price remains. Apart from the right to rescind the contract of purchase of shares, a shareholder has no right to withhold payment of the price.
A shareholder's contract to purchase shares is only voidable, and not void on account of misrepresentation in the prospectus: Oakes v. Turquand, In re Scottish Petroleum Co., and Tennent v. The City of Glasgow Bank. This means that the contract is valid till rescinded. But a shareholder has not unlimited time within which to rescind the contract; he must rescind it promptly, that is within reasonable time of his becoming aware of the fraud giving him the right to rescind. In In re Russian Iron Works Co., Kincaid's case, Lord Cairns, L.J., considered delay of three months as fatal to a claim for rescission. The reason, as given in the connected Lawrence's case at page 424, is: "No attempt at repudiation took place for upwards of four months, and during this time Mr. Lawrence must be taken, in my opinion, to have known, not merely that his name was on the register, and that he was so held out to the world as a shareholder in and member of the company but also..."
In Smith's case, he had notice on 13th December, 1865, that the property which the company had contracted to purchase was almost valueless, he received detailed information about it on 19th January, 1866, he filed his bill to rescind the contract on 6th February, 1866, and Sir C.J. Turner, L.J., held that he had come with promptitude, observing that "if time were to be taken as running against him from 30th December, 1865, he possibly might be considered to have come too late."
In In re Scottish Petroleum Co., eighteen months' delay was held to be fatal. The reason why a shareholder must be prompt in rescinding the contract is that the register of shareholders is to be the creditors' guarantee, showing them to whom and to what they have to trust. A shareholder knowing that he was induced by fraud to enter into the contract of purchase of shares, cannot lie by, let his name remain in the register and let third parties enter into contracts with the company on the faith of the register. In In re New Zealand Banking Corporation, Sewell's case. Lord Cairns, L.J., said: "It appears to me that not having done so, and being aware that he was held out to the public as the holder of twenty-three shares, it is too late for him months or years afterwards to enter into that question."
Even repudiation of shares, without taking active steps, is insufficient because the contract to take shares stands on a different footing from another contract. Fry, L.J., stated in In re Scottish Petroleum Co.: "As regards such contracts the Legislature has interposed, and has provided that they shall be made known in a particular way to shareholders and creditors; notice of them is given to the world. Now the general principle is that no contract can be rescinded so as to affect rights required bona fide by third parties under it. It is true that the creditors and the other shareholders have not acquired direct interest under the contract, but they have acquired an indirect interest." The case of a joint stock company is slightly different because there "while the company is a going concern, no creditor has any specific right to retain the individual liability of any particular shareholders."
It is laid dow in Tennent v. City of Glasgow Bank, that a shareholder of a joint stock company can throw back his shares upon the company at any time so long as it is a going concern. But when a joint stock company becomes insolvent and stops payment, a wholly different state of things arises and the shareholder's right to throw back shares is lost.
In the present case, the shares were allotted to the opposite parties in 1934 and they have allowed their names to remain in the register of shareholders. They have taken absolutely no active steps to avoid the contract. They gave no indication of their intention to avoid the contract at any time; the earliest intention that they gave is through their written statements in the suit. It has been found by the learned Civil Judge that the assets of the company were in a very bad state from the very beginning. Sugar industry was a prosperous industry and this company could not start any business for five years. The directors and managing directors were inefficient and guilty of breaches of rules. Managing directors had to be changed repeatedly and a stage arrived when nobody was prepared to become the managing director and the office had to be thrust upon a person who had already proved himself unfit. No dividends were at all granted and general and statutory meetings were not held as frequently as required under the articles. All this state of affairs could not have remained unknown to the shareholders and we are not dealing with one or two shareholders but a very large number of them. Even when calls were made in 1936 and 1937 they did not repudiate the shares. I have, therefore, no doubt that they have lost their rights to rescind the contract by their laches.
In addition to the laches, the winding up of the company raises another bar in the way of the opposite parties to repudiate their shares. The law is that a shareholder cannot be relieved from his shares after a winding up application: Kent v. Freehold Land and Brickmaking Co., In re Scottish Petroleum Co., Tennent v. City of Glasgow Bank and Hirji Khetsey v. Indian Specie Bank Ltd. Some time must be allowed to a shareholder when an investigation in necessary as laid down in Smith's case and In re Scottish Petroleum Co. If a shareholder has started active proceedings to be relieved of his shares, the passing of a winding up order during their pendency would not prevent his getting the relief. The reason why a shareholder cannot throw back his shares upon the company after winding up is that rights of third parties have intervened and, to adopt the language of Baggallay, L.J., in In re Scottish Petroleum Co.: "Equities which would be sufficient as between the shareholder and the company cannot be set up as against the creditors or co-contributories."
When the Legislature has provided the shareholders' register as the means of enabling persons dealing with the company to know to whom and to what they had to trust, it would be no answer to a creditor that the shareholder sought to be charged had been induced by fraud to become a shareholder just as it would be no answer to a creditor that a partner to be charged had been induced by fraud to become one: See Oakes v. Turquand.
"The liability of the shareholders is not under a contract with the creditors, but it is a statutable liability under which the creditors have a right which attaches upon the shareholders to compel them to contribute to the extent of their shares towards the payment of the debts of the company"; this is what Lord Chelmsford, L.C., said in the same case at page 350. Lord Cranworth, agreeing with the Lord Chancellor, said at page 363 that: "The winding up is but a mode of enforcing payment. It closely resembles a bankruptcy, and a bankruptcy has been called, not improperly, a statutable execution for the benefit of all creditors."
Certain dicta of Lord Cairns, L.J., in Smith's case may suggest that his Lordship did not consider winding up as a bar to granting relief to a shareholder. His Lordship was of the view that if the shareholder went to the Court with promptitude to have the fraud redressed, the fact that the interest of creditors was involved in the winding up did not alter the matter and, "the question must be disposed of as if it were to be disposed of upon the bill at the time when the bill was filed and before any winding up, in which case the plaintiff would be entitled to the relief prayed by the bill." There the shareholder had gone to the court with promptitude and before the winding up application was filed. What his Lordship said cannot be said to apply even when a shareholder comes to Court after a winding up application has been filed. Smith's case went up before the House of Lords. There the question was decided merely on the ground that there was no delay and that the subsequent filing of the winding up application did not disentitle him to the relief sought. Their Lordships did not say anything about Lord Cairns' dicta.
In Hansraj Gupta v. N.P. Asthana, the Judicial Committee laid down that if a person is on the shareholders' register with his knowledge and consent at the commencement of the winding up, the invalidity under Section 105 of the Companies Act, 1913, of the contract in pursuance of which he applied for, and was allotted, shares is not a ground for removing his name from the list of contributories because after the winding up his liability in respect of the shares arises ex lege and not ex contractu. Therefore, I hold that the right of the opposite parties to avoid the contract of the purchase of shares is barred not only by the enormous delay that has taken place but also by the winding up of the company.
But the case of the opposite parties does not rest only upon avoiding the contract of purchase of shares; they have another string to their bow which is that there was no valid contract at all. The argument is that the directors who voted for the allotment of the shares to them were disqualified to act as directors, that the allotment was ultra vires and that consequently no contract to purchase the shares came into being at all. I have given the names of the original directors; they were appointed as such on 24th November, 1933. Under the Articles of Association, they were bound to acquire shares of the minimum value of Rs. 5,000 within two months that is by 24th January, 1934. If they failed to acquire the shares they were to be deemed to have acquired them. They were, therefore, bound to pay the application and allotment moneys by 24th January, 1934, and the first and the second call moneys. Directors Nos. 2, 4, 5, also and 8 did not pay even the application money in full by 24th January, 1934; director No. 4, as a matter of fact, did not pay any application money. Directors Nos. 1 to 9 and 11 and 12 did not pay the full allotment money in time; directors Nos. 4 and 12 did not pay any allotment money. The resolution for the first call was passed on 26th November, 1936, and the call money was to be paid within six months, that is by 26th May, 1937. Directors Nos. 4, 5, 8 and 11 to 14 did not pay the first call money at all and director No. 7 did not pay it in time. The resolution for the second call-money was passed on 5th July, 1937; though the prescribed period of time was six months, the resolution allowed a longer period which was illegal. Still directors Nos. 4, 5, 8 and 11 to 14 did not pay the call money at all and directors Nos. 1, 2 and 7 did not pay it within time. Thus all the directors except directors Nos. 10, 13 and 14 ceased to be directors under Section 85 of the Companies Act, on 24th January, 1934, and directors Nos. 13 and 14 ceased to be directors on 26th May, 1937. In 1934 only three persons were qualified to act as directors whereas the quorum for a meeting was four. Consequently the resolutions allotting the shares and making calls for the money were passed in meetings in which there was no quorum. The Official Liquidator relied upon Article 181 which is couched in the same words as Section 86 of the Companies Act, 1913, by which we are governed in these applications. This article, widely worded as it is, supports his contention that in spite of the disqualifications of the directors the resolutions passed by them are valid.
In Hallows v. Fernie, the objection to the allotment of shares on the ground that the directors who made the allotment did not possess the requisite share qualification, was overruled on the basis of a provision in the English Companies Act similar to that contained in Section 86 of the Indian Companies Act. In Dawson v. African Consolidated Land and Trading Co., a call made by Nielson, a director, was upheld though he parted with all his shares and thus become disqualified and was not re-elected as such on acquiring fresh shares before the call was made. Chitty, L.J., emphasised the words "some defect in the appointment" and expressed the view that the provision is not so framed as to render valid a resolution passed by any person who without a shadow of title assume to act as directors of a company. There was no defeet in the appointment of Nielson as director; he only became disqualified subsequently on his parting with his shares. His acting as director in spite of the disqualification was held to be exactly within the words of the article and one of those defects, irregularities or whatever else one ought to call them, which are remedied by Article 114 which is in almost the same words as our Article 181. An identical article again came up for discussion in British Asbestos Co. Ltd. v. Boyd. Farwell, J., stated at page 444: "It is not, therefore, that the facts are not known, but that the knowledge of the defect is not present to the mind of any person to whom it is material at the time to know it. As it is put in Buckley on the Companies Act, 8th Edition, page 230, the object of an article like this and Section 67 of the General Act, is to make the honest acts of de facto director as good as the honest acts of de jure directors."
In the present case, the directors certainly knew that they had not paid the allotment and call moneys, but there is nothing to indicate that the fact that they had thereby disqualified themselves was present to their minds at the time when they allotted the shares and made the calls. There was no defect in their appointment as directors; the only defect is that they continued to act as directors even after their disqualification. There is no suggestion that they acted dishonestly in passing the resolutions of allotment and making the calls. It seems that they acted bona fide, oblivious of the fact of their disqualification. There is no evidence of the fact of their disqualification having ever been brought to their minds. The language of Article 181 fully protects their actions. Had it been a case of only one or two directors continuing to act as such despite the disqualification, I would have had no hesitation in forming the conclusion that I have. Here we have to deal with a large number of directors acting as such despite the disqualification. But there is no other circumstance from which it can be said that they were conscious of the fact of their disqualification and yet continued to act as directors. So I come to the conclusion, though not without some hesitation, that the acts of allotting the shares to the opposite parties and making the first and second calls were valid.
For the same reason the act of forfeiting the opposite parties' shares also must be held to be valid. The liability of the opposite parties to pay the moneys that are being demanded of them by the Official Liquidator arose before, and is not wiped off by, the forfeiture. The only effect of the forfeiture is that the shares pass out of their hands, the liability incurred previously to pay the allotment and call moneys remains.
Some of the opposite, parties purchased only ordinary shares. This only affects the amounts due from them: otherwise there is no difference between their cases and those of preferred shareholders.
No other dispute was raised before us.
I would, therefore, allow all these applications and decree the suits; but I would not allow any costs to the Official Liquidator. The company must bear its costs of both Courts itself because it has not come out clean from this litigation and though justice lies on its side as regards the subject-matter of this litigation there is much for which its directors and managing directors had to account to the opposite parties.
Mushtaq Ahmad, J.—I agree.
By the Court.—We allow this application, set aside the decree of the lower appellate Court and decree the plaintiff-applicant's suit. We make no order about the costs in all the three Courts.
[1934] 4 COMP. CAS. 8
(OUDH)
CHIEF COURT OF OUDH
v.
Jasjit Singh
RAZA AND NANAVUTTY, JJ.
FIRST APPEAL NO. 2 OF 1932
MARCH 3, 1933
Akhtar Husain for the Appellant.
Radha Krishna, S.N. Srivastava and Saraswati Prasad for the Respondent.
This is a plaintiff's appeal from a judgment and decree of the learned Subordinate Judge of Kheri, dated 21st September, 1931, dismissing the plaintiff's suit with costs. The facts out of which this appeal arises are briefly as follows : The plaintiff corporation, Shri Mahalakshmi Sugar Corporation Limited, Lakhimpur, is a joint stock company registered under Section 17, Act VII of 1913, with its head office at Lakhimpur.
It has sued the defendant Sardar Jasjit Singh, through its late managing agent Lala Har Kishun Lal. The defendant, Sardar Jasjit Singh, agreed to purchase one hundred shares in the plaintiff corporation each valued at Rs. 100 on 30th September, 1922, and on 28th October, 1922, Rs. 1,000 were deposited by him by means of a cheque in respect of 100 shares, and on 16th November, 1922, one hundred shares were entered in the register of the company in the name of the defendant, Sardar Jasjit Singh, and from that date the defendant became a shareholder in the plaintiff company. The plaintiff corporation later on demanded the remaining sum of Rs. 9,000 which was the balance of the price due in respect of the said hundred shares, but the defendant paid nothing. Under Article 30 of the articles of association, the plaintiff company alleges that it is entitled to get interest at 9 per cent. per annum from the date of each of the five "calls" to 8th August, 1929, the date of forfeiture of the said shares. On 8th June, 1929, the plaintiff corporation gave notice to the defendant in respect of confiscation of his shares under Article 34 of the memorandum of association, stating therein that if the defendant did not pay within 15 days the remaining amount due from him with interest to the plaintiff company at Lakhimpur, his shares would be forfeited, and accordingly, on 8th August, 1929, the plaintiff corporation confiscated the shares of the defendant, and a notice to that effect was given to the defendant. The plaintiff company alleges that Rs. 4,050 are due to it by way of interest at 9 per cent. per annum from the date of each of the five "calls" up to 8th August, 1929, the date of forfeiture of the said shares, together with the balance of Rs. 9,000 which makes the total of Rs. 13,050, on which interest from 8th August, 1929, to the date of suit comes to Rs. 1,574. In this way the plaintiff claims a decree against the defendant for a sum of Rs. 14,624.
The facts set forth above are practically admitted by the defendant. Upon the pleas raised by the defendant, the following issues were framed by the learned Subordinate Judge: (1) Is the claim in respect of all the calls and the allotment money within limitation ? (2) Has the plaintiff a fresh cause of action from the date of the alleged forfeiture of the shares ? (3) Has he plaintiff no right to forfeit the shares ? (4) Is the stipulation as to forfeiture of shares as also for realization of the full amount of the shares with interest penal ? If so, its effect ? (5) How does the fact that the plaintiff took no steps to enforce his claim by sale of the shares affect the present suit ? (6) Is the plaintiff entitled to any and what rate of interest? (7) Is the plaintiff entitled to sue in respect of the money due under Article 39 of the Articles of Association in spite of his having allowed the period of limitation to expire as alleged ? (8) Was there any valid forfeiture of the defendant's shares? (9) Is the defendant not liable for the reasons given in para 2 of his written statement ? (10) To what amount, if any, and on what terms is the plaintiff entitled ?
The learned Subordinate Judge decided issues 1, 2, 4 and 7 in the negative. He decided issues 3 and 8 in favour of the plaintiff. His finding on issue 5 was that the fact that the plaintiff took no steps to enforce his claim by sale of the shares did not affect the present suit. His finding on issue 6 was that the plaintiff was entitled to interest at 9 per cent. per annum. His finding on issue 9 was against the defendant. On issue 10, he held that the plaintiff was not entitled to any relief, and so he dismissed the suit with costs. The plaintiff has therefore filed the present appeal in which he challenges the findings of the lower Court on issues 1, 2 and 7. The defendant's learned counsel, in the course of his arguments, has also challenged the finding of the lower Court on issue 8. The plaintiff's learned counsel, Mr. Kampta Prasad, in the trial Court stated that the dates on which the five "calls" which the defendant failed to pay were payable were as follows : (1) Rs. 1,500 due on 26th November, 1922, in respect of 15 per cent. allotment money. (2) Rs. 2,500 due on 6th March, 1923, on account of 25 per cent. first call. (3) Rs. 1,000 due on 15th July, 1924 on account of 10 percent. second call. (4) Rs. 2,000 due on 16th December, 1924, on account of 20 per cent. third call. (5) Rs. 2,000 due on 16th March, 1925 on account of 20 per cent. final call; total Rs. 9,000.
Thus it is clear from the statement of the plaintiff's own counsel that the forfeiture of the shares on 8th August, 1929, happened three years beyond the dates when the respective calls set forth above became due. In other words, the forfeiture of the defendant's shares took place when a suit by the plaintiff company for recovery of "call" money had become time-barred under Article 112, Schedule 1, Limitation Act. Article 112, Limitation Act, lays down that the period of limitation for a suit for recovery, of "call" money by a company registered under any Statute or Act is three years from the date when the call is payable. The dates on which the calls became payable have been set forth above in the words of the plaintiff's own counsel, and on the date of the forfeiture of the shares of the defendant the plaintiff's suit for recovery of any one of these sums due as "call money" from the defendant had become time-barred on the plaintiff's own showing.
It is however contended by the learned counsel on behalf of the plaintiff-appellant that the liability of the defendant to pay all sums of money due to the plaintiff continued as long as his name remained as a shareholder in the register of the company, and it was contended that Article 33, read with Article 43, of the articles of association of the plaintiff corporation clearly sets forth that the liability of a shareholder continues as long as his name is on the register of the company, and reliance was also placed on section 38, Companies Act, VII of 1913. It was further argued on behalf of the plaintiff company that the fact that the defendant's name continued to appear in the register of the company showed that the directors of the company had condoned the non-payment of the "call money" by the defendant within limitation and had extended the period for the payment of the money due, irrespective of the period of limitation prescribed for bringing a suit for recovery of call money under Article 112, Limitation Act. Reliance was also placed upon a ruling of their Lordships of the Bombay High Court reported in Habib Rowji v. Standard Aluminium and Brass Works Ltd., in which it was held that although on the forfeiture of the shares the defendant had ceased to be a member of the company and liable in that case to be sued for past calls, the foundation of the suit was the special contract contained in Article 32 of the articles of association under which a fresh liability was created to pay all calls and other money owing in respect of the shares at the time of forfeiture, and inasmuch as the cause of action thereon had not arisen till the forfeiture, the suit was not barred.
We regret we are unable to accept the contentions advanced on behalf of the plaintiff company by their learned counsel, Mr. Akhtar Husain. In the case cited and relied upon by the learned counsel for the plaintiff, it was held by the learned trial Judge (Kemp, J.), that the suit was not barred by limitation, for on the date when the shares were forfeited (3rd August, 1921), the claim for allotment money and calls was not barred. In the present case, it is admitted by the plaintiff's learned counsel himself that on the date when the shares were forfeited by the plaintiff company on 8th August, 1929, the plaintiff company's claim for allotment money and call money had become clearly time-barred. The ruling relied upon by the learned counsel for the plaintiff does not therefore help him in the present suit. The phrase "owing upon or in respect of such shares at the time of the forfeiture" which occurs in Article 39 of the articles of association, clearly refers to such sums of money as are legally due to and legally recoverable by the plaintiff company from the shareholder. The same interpretation was put by their Lordships of the Bombay High Court in the ruling cited above in respect of Article 32 of the articles of association of the Standard Aluminium and Brass Works, Ltd. The words "owing upon or in respect of such shares" were held to mean moneys presently payable by the shareholder and legally due to the plaintiff company at the time of forfeiture. To accept the contention of the learned counsel for the plaintiff would lead to most absurd results, as pointed out by the learned Subordinate Judge, and would practically abrogate the rule of limitation prescribed under Article 112, Limitation Act.
It is clear that the forfeiture of the shares of defendant by the plaintiff company cannot revive debts which had become time-barred. Article 39 of the articles of association of the plaintiff company merely has the effect of keeping alive the claim of the plaintiff against the quondam shareholder whose shares have been forfeited in respect of moneys legally recoverable at the time of forfeiture. The learned counsel for the plaintiff-appellant has also relied upon a ruling of the Bombay High Court reported in Maneklal Mansukhbai v. Suryapur Mills Co., Ltd. In this case the ruling reported in Habib Rowji v. The Standard Aluminium and Brass Works, Ltd, was followed. This however, was a suit filed by the liquidator of a company which had gone into liquidation, and section 156, Companies Act, clearly lays down that in the event of a company being wound up, every present and past member shall be liable to contribute to the assets of the company to an amount sufficient for payment of its debts and liabilities and the costs, charges and expenses of the winding up, and in such a case even the time-barred debts due from a shareholder can be recovered by the liquidator. In Jagannath Prasad v. U. P. Flour and Oil Mills Co., Ltd., Piggot and Walsh, JJ., made the following pronouncement:
"A question of principal has been raised, apparently for the first time in this Court, namely, as to whether an unpaid call, due from a shareholder of a company, which has become statute barred under Article 112, Limitation Act, and has therefore ceased to be recoverable by the company, may yet be recovered if at any date subsequent to its having become time-barred the company is wound up. . . . It is a statutory right of the creditors of a company to enforce against the contributories of an insolvent company through the Court the obligation which the shareholders took upon themselves when they originally sub-scribed in the event of insolvency subsequently overtaking the company."
Thus the position of a liquidator of a company which has been wound up is different from a company which is a going concern and is solvent. The ruling of the Bombay High Court reported in Maneklal Mansukhbhai v. Suryafur Mills Co. Ltd., has therefore no applicability to the facts of the present case. Similarly, in Prayan Prasad v. Gaya Bank and Trades Association, Ltd., it was held by their Lordships of the Patna High Court that the fact that the company could not realize the call money by reason of lapse of time was no answer to the claim made by the liquidator. In this case the rulings of the Bombay and Allahabad High Courts cited above were approved of and followed. So too in In the matter of Dehra Dun Mussoorie Electric Tramway Co., Ltd., it was held by a learned Judge of the Allahabad High Court that liquidation gave the official liquidators a cause of action which the company may not by itself have possessed, and it was further held that the member of a company in liquidation was liable in respect of unpaid calls even though as against the company the realization of such calls would have become barred by limitation. The plaintiff company cannot in the present suit claim the rights and privileges which the liquidator of a company which is being wound up has against the shareholders past and present of that company. In the present suit on the date of forfeiture, the demands which the plaintiff company had against the defendant were time-barred. We therefore have no hesitation in agreeing with the learned Subordinate Judge that the Plaintiff's suit was clearly time-barred and we uphold the findings of the learned Subordinate Judge on issues 1, 2 and 7 which he decided against the plaintiff company.
In view of the fact that we have upheld the findings of the lower Court on issues 1, 2 and 7, it seems unnecessary to discuss the correctness of the finding on issue 8, although the learned counsel for the defendant has pointed to various facts which go to throw doubt as to the validity of the order of forfeiture. We however think it unnecessary to discuss this matter at length, seeing that the plaintiff's suit fails on the plea of limitation. For the reasons given above we uphold the judgment and decree of the lower Court and dismiss the appeal with costs.
[1957] 27 COMP. CAS. 647 (TRAVANCORE-COCHIN)
HIGH COURT OF TRAVANCORE-COCHIN
Canara Bank Ltd.
v.
KOSHI C.J.
AND M. S. MENON J.
A.S. No. 25 of 1955
JUNE 15, 1956
M. S. MENON
J. - The Canara Bank Ltd.,
Mattancherry, the plaintiff in O.S. No. 169 of 1124 of the District Court of
Anjikaimal, is the appellant before us. The suit was for money due from
defendants 1 and 2 and paragraphs 10 and 11 of the plaint, hereunder
reproduced, deal with the question of the paramount lien claimed by the
plaintiff and denied by the trial court :
“10. The first
defendant holds 30 preference shares and 15 ordinary shares in the shareholding
of plaintiff bank, as detailed in schedule C below. For all amount due to the
bank from the first defendant, the bank has a first and paramount lien on these
shares under article 36 of the articles of association of the bank, and the
bank claims to enforce the said lien by calls of these shares in enforcement of
the amounts due to the bank, as aforesaid.
11. The third
defendant is impleaded in this suit as he also claims a lien over the said
shares of the first defendant. The third defendant’s lien, if any is available
to him, can only be had subject to the first and paramount lien of the
plaintiff bank respecting the amounts due to the bank as aforesaid. No other
relief is claimed against the third defendant, except that of the plaintiff
bank’s right to a proper lien over these shares as against the third defendant,
who is stated to be in possession of these shares.”
Issue No. 5.
“Has the plaintiff not got a paramount lien over the C schedule shares for all
the plaint amounts in priority to the third defendant’s claim” relates to this
matter. The lower court has dealt with the issue as follows :
“The shares
mentioned in C schedule are Exhibits 1 to 1 (C). Admittedly they were offered
in the open market for sale without notice of the lien if any which the plaintiff
bank had under article 36 of the article 36 cannot apply in the case of such
shares. Further if the plaintiff bank intended to have any lien, it should have
taken possession of these shares. But these shares have been taken possession
of these shares. But these shares have been produced by the third defendant. In
these circumstances I am satisfied that the third defendant who is in
possession of these shares has a prior charge over that of the plaintiff. Issue
found accordingly.”
This is a very
unsatisfactory disposal of the points that really arise of consideration.
Article 36 of
the articles of association of the bank (Exhibit AA) is in the following terms
:
“The bank
shall have a first charge and paramount lien upon all the shares registered in the
name of each member (whether solely or jointly with others) and on all
dividends declared or payable in respect thereof as also upon the deposits of,
or any amounts due by the bank to a member or other person, for his debts,
liabilities or engagements solely or jointly with any other person to or with
the bank, whether the time for the payment, fulfilment or discharge thereof
shall have actually arrived or not; and no equitable interest in any share or
in any deposit or money payable by the bank shall be created except upon the
footing and condition that in the case of shares article 6 thereof is to have
full effect. Unless otherwise agreed, the registration of a transfer of shares
shall operate as a waiver of the bank’s lien, if any, on such share.”
As stated in
Palmer’s Company Law (19th Edition, page 134) : “A company has, prima facie, no
lien on the share of member; but the articles may, and usually do, provide that
the company shall have a paramount lien on the shares of each member for his
debts and liabilities to the company, whether matured or not”, and this is
exactly what has been done by article 36. There can be no doubt that such a
provision is effective and that its effect cannot be destroyed - as the lower
court seems to think - either by the fact that the shares are bought and sold
in the open market or that they are fully paid up or because of the company’s
failure to obtain custody of the shares.
The
controversy that has engaged the attention of courts has never been on the existence
or validity of such a lien but its availability after notice in respect of
transactions subsequent to the receipt of the notice. As observed by Palmer :
“A lien clause in the articles not infrequently gives rise to questions of
priority between the company asserting the lien and persons claiming under the
shareholder. For example, the company may receive notice that the shareholder
has mortgaged or sold the shares, and the question then arises whether, if the
shareholder subsequently becomes indebted to the company, the company’s lien
will rank in priority to the mortgagee or purchaser.” (Palmer’s Company Law,
19th Edition, page 134).
The third
defendant informed the bank of the equitable mortgage created in his favour by
the deposit of the shares apparently by a letter dated 9th July, 1948. That
letter is not before us. The bank’s reply to that letter has, however, been
produced. It is Exhibit AC. dated 24th July, 1948, which is in the following
terms :
“As we are
entitled to a first charge and paramount lien under article 36 of the articles
of association of the bank we can recognise your lien on the above shares only
subject to our paramount lien.”
The total
amount claimed in the plaint is made up of amounts falling under three distinct
heads and in paragraph 13 of the plaint the cause of action for the suit is
stated as follows :
“The cause of
action for the suit arose on, from 15th October, 1947, to 2nd July, 1948,
respecting the demand bill amounts; on 10th August, 1948, 17th August, 1948, and
30th December, 1948, relating to overdraft amounts and 8th January, 1947, and
3rd April, 1947, relating to gold loans and thereafter within the jurisdiction
of this hon’ble court at Mattancherry, Cochin, where the plaint transactions
took place and where all the defendants reside.” It is clear from the above
that the claim in respect of the overdraft alone arose subsequent to the notice
given by the third defendant and as the learned counsel for the appellant is
prepared to confine the claim for priority to the other two heads of claim it
is unnecessary for us to consider the effect of the notice dated 9th July,
1948, section 33 of the Indian Companies Act, 1913, and the exemption clause
(article 6) in Exhibit AA :
“The bank
shall be entitled to treat the registered holder of any share as the absolute
owner thereof; and accordingly shall not be bound to recognise (notwithstanding
any notice thereof) any mortgage or charge thereof or thereon or other claim to
or interest in such share on the part of any person other than the registered
holder, his executors, administrators or holders of succession certificates
under the Indian Succession Act, 1925, in respect of his share, and other than
such rights upon transmission as hereinafter mentioned.”
We entertain
no doubt that as regards the two heads of claim in respect of which priority is
claimed before us (items 2 and 3 of the particulars of claim given in the
plaint) the bank is entitled to succeed on the basis of article 36 of Exhibit
AA and decide accordingly.
The appeal is
allowed to the extent indicated above; but in the circumstances of the case
without any order as to costs.
Appeal
allowed in part.
[1960]
30 COMP. CAS. 582 (
V.
P
C MALLICK, J.
SUIT
NO. 487 OF 1956
MARCH
3, 1958
P.C.MALLICK,
J. - This is a suit in which
he plaintiff seeks to establish his title to a bunch of 26,752 ordinary shares
in the defendant company. The company and one Ramapada Gupta in whose name the
shares are registered in the books of the Company have been impleaded as
defendants.
The Plaintiff
who was born in
At the
beginning the company used to deal with imported medicines. In 1939, the
plaintiff conceived the idea of manufacturing medicine and with that object the
plaintiff appointed Dr. Mukherjee a very able chemist and put him in charge of
the manufacturing side. Dr.Mukherjee was given full scope and every facility to
manufacture medicine. Dr. Mukherjee in his turn proved his worth.
Dr.Mukherjee's services to the company were RECOGNISED and he was made a
director of the company in July, 1940. In a formal resolution passed in a
meeting of the board of directors held on May, 4, 1943, the plaintiff as managing
director recorded that, the success achieved by the company was chiefly due to
the quality products prepared by Dr.Mukherjee. The phenomenal success of the
company will appear from the sale of its products which rose to over Rs.50
lakhs from 1952 onward. Dr.Mukherjee's position in the company steadily
improved and while the plaintiff was the No.1 in the Company, Dr.Mukherjee
became No.2. Dr.Mukherjee's remuneration was increased with the passage of time
and when the dispute started Dr.Mukherjee was getting as his remuneration 1 per
cent of the total sale, i.e. more than Rs.55,000 per annum. This was much more
than what the plaintiff was getting as Managing Director. In 1948, Dr.Neogy was
appointed as a propaganda officer on a salary of Rs.500 per month. Shortly,
there after Dr.Neogy was made a director.
In January,
1949, Dr.Mukherjee went to
It appears that
feelings between the parties were strained in the middle of 1954. Dr.Mukherjee
stated in his evidence that he apprehended that he would be thrown out from the
company. The plaintiff denied that he had any such intention . Be that as it
may , whatever the motive of Dr.Mukherjee might have been i.e. to prevent the
plaintiff from ousting him as a measure of self protection or to himself get
supreme control of the company by ousting the plaintiff Dr.Mukherjee acted and
acted with vigour. There was a general meeting of the company on the morning of
September, 10, 1954, to increase the share capital. The meeting was held in
which the plaintiff, Dr.Mukherjee, and Dr.Neogy amongst others were present.
The plaintiff wanted the increase of share capital by the issue of preference
shares only because this carried no voting right. Dr.Mukherjee's party wanted
the increase of share capital by the issue of ordinary shares. According to the
plaintiff, the meeting ended without passing any resolution, while according to
Dr.Mukherjee the meeting unanimously agreed to increase the share capital by
the issue of 60,000 additional ordinary shares. There is a minute of the
company to this effect. The plaintiff contends that it is a false minute. Be
that as it may, it is clear that there was open hostility between the plaintiff
one one side and Dr.Mukherjee, with whom Dr.Neogy sided, on the other. Events
began to move rapidly thereafter. A meeting of the board of directors was
alleged to have been held at 4.00 P.M. in the office in which Dr.Mukherjee and
Neogy were alleged to have been present. No notice of the meeting was given to
the plaintiff because Dr.Mukherjee was proceeding on the basis that the
plaintiff had ipso facto vacated his office as director. In this meeting a number
of important resolutions were passed. Services of seven employees who,
apparently , were loyal to the plaintiff were terminated. The plaintiff was
deprived of the power of operating on company's account. Messrs and Biswas were
appointed solicitor of the company and lastly the company was declared to have
a lien on all the shares registered in the name of the plaintiff for the sum of
Rs.4,00,887-14-8 alleged to be a debt due by the plaintiff to the company on
the said date. At or about the same time, all the plaintiff's men including his
son-in-law were physically ejected from the factory premises and the plaintiff
himself was refused access either in the factory or in the office. It is clear
that Dr.Mukherjee acted with vigour and succeeded in his coup and got complete
possession of the company,. Mr.Subimal Roy learned counsel appearing for the
plaintiff characterised this coup as the first stage in the conspiracy to
deprive the plaintiff of his interest in the company.
To continue
the narrative. On September, 16, 1954, the plaintiff intimated Drs. Mukherjee
and Neogy that they had ceased to be directors as no meeting of the company was
held since December, 7, 1950. On September, 18, 1954, the plaintiff's then
solicitors Messrs. Sandersons and Morgans wrote to Drs. Mukherjee and Neogy to
the same effect. On September, 23, the directors resolved to enforce the lien
against the plaintiff's shares and Dr.Mukherjee was authorised to serve notice
of demand for payment of the debt and also to serve notice of sale in default
of payment. This notice was served on the plaintiff on the following day. This
notice was replied to by the plaintiff's then solicitors on the 27th in which
the indebtedness was denied , the right to sell the shares was disputed and the
company was warned that any action taken on the basis of this notice would be
illegal and would be contested. In October, 1954, the parties came to Court.
The Plaintiff
filed a suit seeking a number of declarations, [1] to protect his right to act
as managing director,[2] challenging the validity of the issue of new shares
and allotment thereof and a number of other reliefs. In this Suit Dr.Mukherjee
, Dr.Neogy and the company were impleaded as defendants. This is Suit No.3112
of 1954. On November, 15, 1954, another suit was filed by Mrs.Judah and
Nagendra Nath Ghose on behalf of all the shareholders against Dr.Mukherjee,
Dr.Neogy and Debendranath Bhattacharji in their capacity as representative of
the newly issued shares for a declaration that the plaintiff was still the
managing director, for injunction restraining the defendants from interfering
with the management of the company and for other reliefs. This is Suit No.3117
of 1954. There were some interlocutory proceedings in these suits. In Suit
No.3117 of 1954 on the application of the plaintiff a receiver was appointed by
P.B.MUKHERJEA J. against which an appeal was preferred. This is Appeal No.56 of
1955. An injunction was issued on the plaintiff's application in Suit No.3112
of 1954 restraining the sale of the same shares, as in the instant Suit.
Ultimately the suits were settled and withdrawn, and on January, 24, 1956, the
receiver made over posession of the Company to Dr.Mukherjee pursuant to the
order of the Appeal Court in Appeal No.56 of 1956. On the same date the shares
in Suit were sold to the defendant, Ramapada Gupta for Rs.2,67,520. The
defendant Ramapada Gupta is alleged to have paid Rs.1,30,000 on account of
price and the balance to be paid after delivery of the relevant share
certificates. Ramapada's name was immediately entered in the share register as
the owner of the said shares in place of the plaintiff. This will appear from
the letter written by the Company to Ramapada Gupta bearing dated 24/25th
January, 1956. By a letter dated February, 1, 1956, the plaintiff was informed
by the company that in enforcement of the lien the entire bunch of ordinary
shares of the plaintiff had been sold " and the purchaser's name had been
entered in the register of members as the registered holder of the said shares."
The name of the purchaser and the price paid, however , was not mentioned in
the letter. The plaintiff thereafter instituted the present suit on February,
14, 1956.
The suit is
instituted for a declaration that the plaintiff is the holder of 26,752
ordinary shares and as such is alone entitled to the rights and privileges
attached to the shares, that the transfer of shares in the name of the
defendant Ramapada Gupta is illegal, void and inoperative , that the defendant
Ramapada Gupta be restrained by an injunction from exercising any right or
privilege attached to these shares, that the share register be rectified and
other reliefs, such as damages against Ramapada Gupta. It must be admitted that
the drafting of the plaint is not very happy. There are, however, averments
which do disclose a sufficient cause of action against both the defendants. The
plaint does contain, inter alia , the following averments. No general meeting
having been held for years, there were no properly appointed directors from
January, 1951, onwards and that Drs. Mukherjee and Neogy had discovered before
September, 23, 1954, that they had vacated their office and were not entitled
to act as directors and that they nevertheless persisted in acting as
directors, that the general meetings that were held after 1950 were al illegal;
that no debt was due by the plaintiff as alleged or at all for which the
company can claim any lien and that in any event it was was not an ascertained
amount or presently payable. The sale was purported to be held by
Dr.S.L.Mukherjee and Dr.B.P.Neogy who masqueraded themselves as the board of
directors, in other words, it is alleged that they acted as directors though
they were not in fact directors. The sale has been characterised as fraudulent
in consequence. There is a clear averment that the defendant Ramapada Gupta had
full knowledge of the illegal nature of the transaction and that the sale was
fictitious. These allegations, in my judgment , do amount to an averment of
absence of bona fides on the part of Ramapada Gupta in respect of his purchase
if there was a purchase at all.
The company in
its written statement disputed each of the allegations made in the plaint. It
is pleaded that, the various meetings of the company were properly held, that
Dr.Mukherjee and Dr.Neogy were properly appointed as directors and were
entitled to act as such, that the plaintiff was liable to pay to the company
the sum referred to in the letter dated September, 24,m 1954, that the same was
presently payable and that the company had a lien on the shares of the
plaintiff for the said sum, that the sale was properly effected in enforcement
of the lien. It is alleged that the plaintiff is not entitled to challenge
Ramapada's title as purchaser. It is denied that the sale was fraudulent or
fictitious as alleged in the plaint. In paragraph 22 the point is taken that
the suit is bad for non -joinder of necessary parties. In paragraph 23 it is
pleaded that the suit is barred by the provisions of Order II rule 2 and Order
XXIII rule 1[3] of the Code of Civil Procedure by reason of the withdrawal of
suits Nos.3112 and 3117 of 1954 without permission to institute a fresh suit.
The defendant Ramapada Gupta in his written statement made out substantially
the same defence. In paragraph 1 of the written statement he sets out the
informations he had when he purchased the shares. The only information he had
was that the shares belonged to the plaintiff, that the plaintiff was indebted
to the company for Rs.4,00,887-14-8 for which the company had a lien, that due
notice to enforce the lien was given, that the plaintiff instituted a suit
challenging his indebtedness to the company , that in the said suit, an
injunction was issued against Dr.Mukherjee and Dr.Neogy restraining them from
selling the shares in enforcement of the lien and that the suit was withdrawn
without any liberity to institute a fresh suit on the same subject matter. He
had further information that by an order of the court of the appeal the
receiver was directed to make over possession to a nominee of the board of
directors consisting of Dr.Mukherjee and Dr.Neogy and D.N.Bhattacharji and that
on January, 24, 1956, when Ramapada Gupta purchased the shares, no suit was
pending with respect to the shares and that the plaintiff had not paid off his
dues to the company. Fully relying on these information the defendant Ramapada
Gupta bona fide purchased the said shares at par.
On these
pleadings the following issues were settled :
" 1. Is this suit barred
by Order II, rule 2[3] and/or Order XXXIII, rule 1[3] of the Code of Civil
Procedure ?
2. Were any annual general
meetings of the company held on January, 6, 1955? Were the elections of
directors in the said meetings invalid as alleged in the plaint ?
3.(a) Were there no directors or sufficient directors of the company as
alleged in the paragraph 14 of the plaint?
(b) Did five members of the company convene an extraordinary general
meeting as alleged in the said paragraph? If so, was it duly convened?
(c) Was there any extraordinary general meeting of the company as
alleged in the said paragraph? If so, was a new board of directors elected in
the said meeting as alleged in the said paragraph? Was such election lawful?
4.(a) Was there any money due by the plaintiff to the defendant company
for debts or liabilities? If so, how much?
(b) How much of the said amount is covered by the notice dated
September, 24, 1954?
(c) For what sum the company had a lien on the plaintiff's shares?
(d) Was the defendant company entitled to sell the shares in
enforcement of such lien?
5. Was the sale of 26,752
ordinary shares of the company belonging to the plaintiff to the defendant No.1
bad, illegal or void as alleged in paragraph 21 of the plaint?
6. Did defendant No.1 connive
and/or otherwise conspire with Dr.Mukherjee and Dr.Neogy in effecting the sale
of the said shares to defendant No.1 and in entering the name of defendant No.1
in the share register of the company?
7. Is the plaintiff entitled
to rectification of the share register?
8. Did the plaintiff continue
to be the owner of the shares in suit after the date of alleged sale ?
9. Did Dr.S.L.Mukherjee or
Dr.Neogy vacate their office of directors or cease to be directors of the
company as alleged in paragraph 9 read with paragraphs 7 and 8 of the plaint?
10. Is the suit bad for non
-joinder of Dr.S.L.Mukherjee and Dr.Neogy?
11. To what relief or reliefs,
if any, is the plaintiff entitled?
In support of
his case plaintiff tendered his own evidence. The defendant company tendered the
evidence of Dr.S.L.Mukherjee, its present managing director, Sri Vimal Mitra,
the accountant in 1954, and a number of other employees of the company and one
Dr.Das Gupta. Defendant Ramapada Gupta did not tendered his own evidence nor
call any witness to tender evidence on his behalf. Over and above this oral
evidence a large mass of documentary evidence has been tendered. To prove the
plaintiff's liability, ,entries in the ledger books of the company for various
years, a number of statements compiled by the officers of the company, the
balance sheets of the company with auditor's report, a large number of vouchers
and correspondence have been tendered. The proceedings in the minute books of
the general meetings and directors' meetings have also been tendered by either
side. As none of the documents were admitted and formal proof was not dispensed
with, considerable time was spent in formally proving the entries in the
vouchers and the minutes and records of the company. Witnesses who came to
prove these documents were elaborately cross examined . Certain court
proceedings and correspondence have also been tendered in evidence.
[His Lordship
considered the evidence and then held that the withdrawal of suits Nos.3112 and
3117 of 1954 did not operate as a bar to the institution of this suit ]
The shares in
suit were sold to liquidate the plaintiff's indebtedness to the defendant
company amounting to Rs.4,00,887-14-8. According to the defendant company this
total liability of the plaintiff consists of :
(a)
(a) Plaintiffs debit balance in the personal
account amounting to rs.81,002.
(b)
(b) Unrealised debit balance –
(i)
Albert David [G.B.] Ltd.
amounting to Rs.57,918-3-9
(ii)
Albert David [Pak.] Ltd.
amounting to Rs.1,608-2-0 and
(iii)
Albert David [Cey.] Ltd.
amounting to Rs.54,654-4-6 and[c] Unusual discount given to
(iv)
Albert David [Cey.] Ltd.
amounting to Rs.76,392-4-0 and
(v)
Albert David [Pak.] Ltd.
amounting to Rs.1,29,313-0-1.
The plaintiff
is held liable for the unrealised debit balance against the three said foreign
companies,. He is also made liable for the unusual discount alleged to have
been given by the plaintiff the Ceylon and Pakistan companies.
Taking the
unrealised debit balance of the Great Britain, Pakistan and Ceylon companies
first: The claim of the defendant company against the debtor companies have
been proved by entries in the books of account, which have been tendered in
this case. I have held that the plaintiff as managing director of the company
will not be allowed to take advantage of the irregularities in the account
books on the basis of which the company's balance sheet up to October, 1953,
were prepared. I will therefore take it as proved that the Great Britain
company, Pakistan company and Ceylon Company were indebted to the defendant
company for the sums stated above. The claims against the Pakistan and Ceylon
companies were for goods sold and delivered. The nature of the claim against
the Great Britain company is not very clear. The original indebtedness is
alleged to have arisen in 1948, when the defendant company is alleged to have
advanced a considerable sum of money to the British company. This sum
represents the price of goods sent by the British company to the defendant company.
Gradually as the goods were sold by the defendant company the sale proceeds
were credited to the Great Britain Company and the debit entry being the amount
advanced have been decreased. According to the plaintiff, a considerable amount
of the said consignment sent by the Great Britain Company is there still . The
transaction according to the entries in the books does not appear to be a case
of sale by the British Company . Entries are more consistent with agency , the
defendant company having acted as the agent of the Great Britain Company and
advanced the value of the goods to the principal. But assuming as I do that
there are debts due by these foreign companies to the defendant company, I do
not understand how they become the liability of the plaintiff. Regarding the
claim made on account of the unusual discount alleged to have been given by the
plaintiff to the Ceylon company, I find on the evidence there was no such thing
as usual or normal discount granted by the company to its different customers
within and outside the country. The plaintiff as managing directorin the usual
course for the purpose of expanding the market granted discount which in many
cases appear to be heavy. This discount was granted in the interest of the
company to push its own products to new markets. There was not the slightest
impropriety in the plaintiff's conduct in granting discount, in some cases
large discount, but the sole motive of the plaintiff in granting large discount
was to benefit the defendant company. There was no motive , as three could not
be, to further the interest of of the Pakistan and Ceylon companies at the
expenses of the defendant company, of which the plaintiff was practically the
owner. Mr. Subimal Roy was justified in characterizing this claim as a
moonshine claim. I have no hesitation in holding that both claims made on
account of unrealised debit balance of the Great Britain, Pakistan and Ceylon
companies and on account of unusual discount given to Pakistan and Ceylon
companies are fantastic. These liabilities against the plaintiff have been
cooked up by Dr.Mukherjee and Dr.Neogy with full knowledge that they are unreal
and fantastic and their motive for cooking up this fantastic liability of the
plaintiff is too obvious.
It is argued
that this liability of the plaintiff as director arises because of the
provisions of section 86F of the Indian Companies Act and because the plaintiff
as the managing director was in the position of trustee. Section 86F of the
Companies Act reads as follows :
"Except
with the consent of the directors, a director of the company, or the firm of
which he is a partner or any partner of such firm of the private company of
which he is a member or director shall not enter into any contracts for the
sale, purchase or supply of goods and materials with the company , provided
that nothing herein contained shall affect any such contract or agreement for
such sale, purchase or supply entered into before the commencement of the
Indian Companies [Amendment] Act, 1936."
In order that
the section may apply, it must be proved that the plaintiff is a member or
director of Great Britain, Ceylon and Pakistan Companies, that these companies
are private companies, that contracts for sale, purchase or supply of goods
between the defendant company and the other companies were effected by the
plaintiff without the consent of the other directors of the defendant company.
If there is no proof of any one of the above facts, the section would not
apply. It is proved from the plaintiff admission contained in his letter to the
company dated July, 7, 1954, that he was interested as a Member and or director
of the three companies though there is no evidence as to when the plaintiff
became interested so as to enable the court to ascertain whether at the time of
each contract for sale or purchase the plaintiff was interested as such. There
is no evidence that the Pakistan company and a Great Britain company are
private companies, though the plaintiff stated in his cross examination that
Ceylon company was a private company. Each of these companies is a foreign
company, and Choudhury is entitled to argue, as he did, that the "private
company" referred to in section 86F must be a private company as defined
by the Indian Companies ACt, which does not include a foreign company. Thirdly,
no contract for sale has been proved to enable the court to ascertain the
nature of contract . It is certainly doubtful whether the section will apply if
an employee of a private company purchases some goods from the defendant company
in the usual course. The plaintiff as managing director of the defendant
company or director of the private company may have have nothing to do with it.
If in fact the contracts were entered into by the plaintiff, I believe the
other directors had full knowledge and consent in the plaintiff trying to sell
goods to the other companies though no resolution to that effect has been
proved to have been passed. I do not think it imperative that there should be a
formal resolution recording the consent of the other directors in the
plaintiff's entering into these contracts. I do not think that section 86F
applies in terms to the facts of this case.
Even assuming
that section 86F does apply to the case, I do not think the section imposes on
the offending director the liability of the private companies. It is argued by
Mr.Das that these contracts for sale of goods to the private companies must be
held to be illegal in the absence of previous consent of the directors and
hence there must be restitution of the benefit to the defendant company under
section 65 of the Indian Contract Act In the first place, the language of the
section does not indicate that such a contract effected by a director without
the consent of the other directors is illegal. The prohibition is against the
director and there is a penalty for any violation of the provisions of the
section. This does not mean that the contract is void . In the second place,
the party liable to restitution under section 65 of the Indian Contract Act is
the private company and even if the plaintiff is a member or director of the
private company he is in law different from the company. It is to be noted,
however, that the claim is made on the footing that the private companies are
liable on account of the balance of price under a contract for sale. The claim
was never made de hors the contract. It is interesting to note that the
defendant company, up to the date of the suit , never repudiated the contracts,
never called upon the private companies to return back the medicines sold by
itself and never offered to return back whatever money it received on account
of price. I am unable to hold that the plaintiff as the managing director of
the defendant company can be liable for the balance of price due and payable by
the foreign companies.
Mr. Das
further argued that even assuming that section 86F does not cover the case, the
plaintiff is, nevertheless. liable on general principles. The plaintiff as a
director was occupying a fiduciary position vis-a-vis the company. Occupying as
he did a fiduciary position the plaintiff as a director of the defendant
company could not in law enter into any dealings with the Great Britain,
Pakistan, and Ceylon companies in which the plaintiff had interest. This is not
permissible on the broad ground that there was a possibility of conflict of
duty and interest, that is, duty as a director of the defendant company and
interest of the plaintiff in the three above companies. The court of equity in
such cases strikes down a contract and refuses to enforce it. In the instant
case, the plaintiff as managing Director of the defendant company did deal with
Great Britain, Pakistan and Ceylon companies, in which admittedly the plaintiff
had interest. All these contracts the court of equity would refuse to enforce.
Therefore they are illegal contracts under section 23 of the Indian Contract
Act. If the contracts resulting in the dealing of the defendant company with
the three above companies are illegal then under section 65 of the contract Act
the benefits received by the three companies from the defendant company are to
be restored. The benefit received by the Pakistan and Ceylon companies is the
unusual commission, that is excess commission above the normal commission and
also the goods. The benefit received by the great Britian company is the
advance made against goods less the price of such portion of the goods. This is
the argument of Mr. P.R. Das to foist the liability on the plaintiff on account
of dealings of the defendant company with the above three companies.
The position
of the directors has been laid down in a number of authoritative decisions. In
Ferguson v. Wilson (1866) 2 Ch. App. 77.
TURNER and CAIRNS L JJ. pointed out that the directors are agents of the company.
The company cannot itself act in its own person, for it has no person; it can
only act through directors and the case is, as regards the directors, merely
the ordinary case of principal and agent, for, whenever an agent is liable the
directors would liable. In some sense to some extent, the directors are no
doubt in the position of trustees. In York and North Midland Ry. Co. v. Hudson
(1853) 16 Beav. 485 ROUMILLY M.R. observed :
"Directors
are persons selected to manage the affairs of the company for the benefit of
the shareholders. It is an office of trust, which if they undertake it is their
duty to perform fully and entirely."
This two fold
character of the directors has been well expressed by LORD SELBOURNE in Great
Eastern Railway Company v. Turner (2) (1872) 8 Ch. App. 149, in these words :
"The
directors are the mere trustees or agents of the company trustees of the
company's money and property; agents in the transactions which they enter into
on behalf of the company."
The
observations of SIR GEORGE JESSEL in the case of In re Forest of Dean Coal
Mining Co. (3) (1878) IO Ch. D. 450. is to the effect that the directors are
trustees of the company assets which have come into their hand or which are
under their control.
It is clear
that the directors are trustees in a very limited sense. They are liable as
trustees for breach of trust, if they misapplied the funds or committed breach
of bye-laws. their position differs considerably from ordinary trustees and it
is futile to apply the entire law of the trust and the whole body of rules
enunciated by the court of equity defining the rights and liabilities of the
trustees, to determine the rights and liabilities of a director. The conduct of
the directors is to be measured with reference to the character of the
undertaking which they are appointed to manage and conduct. In the case of an
ordinary commercial company, a director does not commit a breach of trust when
he, in the usual course of business, sells or purchases goods from another
company in which the director had interest. He is only liable for breach of
trust when he misapplies the fund and misappropriates any assets. In the
instant case, the plaintiff as managing director has neither misappropritated
the funds or the assets of the company nor he is alleged to have committed any
breach of bye-laws. How then can the plaintiff to be held liable ? I do not
understand the argument of Mr. Das that section 23 of the Indian Contract Act
applies to the case of a contract entered into by the managing director of a
public company with another private company in which the said director has
interest. Mr. Das has cited certain cases in which the court of equity refused
specific performance of contract. The fact that a contract is not enforced by a
court of equity on equitable grounds does not make the contract illegal within
section 23 of the Indian Contract Act. There may be a perfectly good contract,
but nevertheless a court of equity would not enforce it on equitable
consideration. There is no statute prohibiting contracts between two companies,
one private and another public, with some common shareholders and common
directors. The two companies in law are two different persons, even though they
have some common shareholders or directors. Section 86 F of the Companies Act
does not, in my judgement, contain any such prohibition. On the contrary, it
expressly states that a director, with the consent of the other directors, can
enter into a contract with a partnership or private company in which he is partner
or shareholder or director. The section does not seem to recognise any public
policy prohibiting a contract between a private and public company with some
common shareholders or directors. Not a single decision has been cited in which
any court, either in India, or in England, has held that such a contract
between a public company and a private company with a common director is void
on the ground of public policy. At best, in one case the court refused to
enforce such a contract and held that it was voidable and the public company
was relieved on the contractual obligation on equitable grounds. No case has
been cited in which after the contract has been fully performed the court
directed restitution of the benefit on the ground that the contract was void.
For reasons
stated above, I hold that the plaintiff was not indebted to the defendant
company on account of its transactions with the Great Britain Company, the
Pakistan company and the Ceylon company. The total claim made by the defendant
company on these accounts comes up to Rs. 3,19,885-14-4. There is no foundation
for this claim.
I have now to
examine the liability of the plaintiff as representing the debit balance in the
plaintiff's personal accounts. This debt is proved by the entire in the company's
general ledger and control ledger of the personal account of the plaintiff and
by vouchers. I have held that it is not open to the plaintiff to contend that
the account books of the company up to October, 1953, are not correct. His
admission contained in the circular letter dated August 16, 1954, is binding on
him. On the basis of entries in the general ledger book, the plaintiff's
liability to the company as an October, 31, 1953, must be held to be Rs.
57,797. Subsequent liability has to be strictly proved. I am not, satisfied
that the entries in the general ledger from November, I, 1953, to September IO,
1954, were made before the plaintiff was ejected from office on September 10,
1954. Nor am I satisfied with the entires made in the control ledger. The
probabilities are that these entries were made after the plaintiff was ejected
and made under the direction of Dr. S.L. Mukherjee, who was ruling over the
destinies of this company since then. Dr. Mukherjee was over-anxious to build
up as much liability of the plaintiff as possible. The entries in the general
ledger and control ledger cannot be taken as sufficient to make the plaintiff
liable. The other evidence is the vouchers. To the extent the vouchers are
signed by the plaintiff and such of the vouchers as have been proved to
represent payment made to the bank on account of the plaintiff's relations or
plaintiff's such relations as wife and daughter, they will constitute the
liability of the plaintiff. But control vouchers from which many of the entire
in the control ledger have been made represent money spent on other accounts
for which the plaintiff has been made liable. These payments were made on other
accounts and Bimal Mitra had no personal knowledge of it. They must have been
debited against the plaintiff personal account by Bimal Mitra under
instructions of the man controlling the company- most probably Dr. Mukherjee or
Dr. Negate. I would not hold the plaintiff's liable on these entires based on
these control ledger vouchers. Many of the other entries in the control ledger
were made by way of transfer of entries from the personal account of other
people to the plaintiff's account. The correctness of the entires in the other
accounts has not been satisfactorily proved.
For reasons
given above, I am unable to hold that on September 10, 1954, the plaintiff in
his personal account was indebted to the defendant company in the sum of Rs.
81,002. The plaintiff has been proved to have been liable on October 31, 1953,
for Rs. 57,797, but for the subsequent period the proof of liability is
insufficient. I believe, however, on the evidence on record that on September
10, 1954, the plaintiff was liable, but not to the extent of Rs. 81,002 as
claimed by the defendant company. It is not necessary for me to determine the
exact indebtedness of the plaintiff in this suit. To appreciate the arguments
advanced by the parties and to be considered later, it is necessary to decide
weather the plaintiff's indebtedness on September 10, 1954, was Rs.
4,00,887-14-6 or whether the plaintiff was at all indebted or if so, whether
the indebtedness was nominal. I hold, on the evidence before me, that the
plaintiff was not indebted to the extent of Rs. 4,00,887-14-6, but that the
plaintiff was indebted for a lower amount and that such amount, though less
than Rs. 81,002-0-4 can not be certainly characterized as nominal I believe
that the in debtness would amount to near about say Rs. 50,000 just to indicate
that the indebtedness was not nominal. I hold further, that on September, 10,
1954, the exact liability of the plaintiff was not ascertained, nor were the
people controlling the company since September 1954, anxious honestly to find
out the plaintiff's liability. Dr. Mukherjee and Dr. Negate, I am satisfied,
were anxious to cook up a liability of the plaintiff to the company as much as
possible, so as to give them a pretext to sell the entire ordinary shares of
the plaintiff. Dr. Mukherjee and Dr. Negate knew that so long as the plaintiff
had this large block of ordinary shares which carried the voting right, their
position in the company was extremely insecure.
The shares in
suit were sold in exercise of the power of sale given to the directors by the
articles of the company to enforce the lien. It has been argued that in the instant
case there was no power of sale in any event, the resolutions imposing lien and
enforcing the lien by sale were passed by men who were not directors of the
company. This leads us to consider the articles under which the sale took
place. The relevant articles are articles 16, 17, 18, and 19, and are set out
below :
" 16. The
company shall have a first and paramount lien and charge available at law and
in equity upon all shares ( whether fully paid or not 0 registered in the name
of any member either alone or jointly with any other persons for his debts,
liabilities and engagements whether solely or jointly with any other person to
or with the company whether the period for the payment, fulfilment or discharge
thereof shall have actually arrived or not and such lien shall extend to all
dividends from time to time declared in respect of such shares. But the
directors may at the any time declare any such share to be exempt, wholly or
partially, from the provisions of this article.
17. The
directors may sell the shares subject to any such lien at such time or times
and in such manner as they think fit, but no sale shall be made until such time
as the money in respect of which such lien exists or some part thereof are or
is presently payable or the liability or engagement in respect of which such
lien exists is liable to be presently fulfilled or discharged and until a
demand and notice in writing stating the amount due or specifying the liability
or engagement and demanding payment or fulfilment or discharge thereof and
giving notice of intention to sell in default shall have been served on such
member or the persons (if any) entitled by transmission to the shares and
default in payment, fulfilment or discharge shall have been made by him or them
for seven days after such notice.
18. The nett
proceeds of any such sale shall be applied in or towards satisfaction of the
amount due to the company or of the liability or engagement as the case may be
and the balance (if any) shall be paid to the member or the persons (if any)
entitled by transmission to the shares so sold.
19. Upon any
such sale as aforesaid the directors may enter the purchaser's name in the
register as holder of the shares and the purchaser shall not be bound to see to
the application of the purchase money nor shall his title to the shares be
affected by any irregularity or invalidity in the proceedings in reference to
the sale."
It is to be
noted that these are not compulsory articles, that is, the company law does not
require that every company must adopt these articles. The articles, therefore,
constitute nothing more and nothing less than an agreement arrived at between
the company and its shareholders. It has to be considered, therefore, what
power the parties intended the company should have to sell the shares in
enforcement of the lien or charge.
Article 16
provides that the company " shall have a first and paramount lien and
charge available at law and in equity upon all shares ... registered in the
name of any member." Article 17 provides that " the directors may
sell the shares subject to any such lien " and does not mention " any
charge." Mr. Chaudhuri contended that on construction of these two
articles it must be held though for the debts and liabilities to it the company
shall have under article 16 a lien at law and charge in equity, yet it is only
in those cases where the company has a lien at law that the directors were
authorised to sell under article 17. The directors have no authority to sell
shares with respect to which the company had no lien at law, but merely an
equitable charge. There would be lien only in those case where the company had
the share-scrips in its possession, that is, the word "lien" has been
used in the sense of possessory of share scrips with respect to the shares, the
scrips of which are not in possession of the company but of the members, there
would be equitable charge and shares subject to such equitable charge were not
intended by the parties to be sold by the company under article 17. The only
way in which such equitable charge could be enforced is by way of a regular
suit in a civil court.
It has been
argued, on the other hand, by the learned counsel for the defendants that the
word "lien" has a more comprehensive connotation. It not merely means
possessor lien but equitable charge as well and the word "lien" has
been used in the articles in the comprehensive sense. That the word
"lien" has a more comprehensive meaning to include "equitable
charge" as well cannot and indeed has not been disputed. ( See the cases
of Everitt v. Automatic Weighing Machine Co. (1) [1892] 3 Ch. 506, In re
National Bank of Wales Ltd. (2) [1899] 2 Ch. 629 at 675., and In re General
Exchange Bank (3) (1871) 6 Ch. App. 818. It has been further argued that when
the word "lien" is provided by articles of the company, it operates
as an equitable charge . ( See the observations in In re General Exchange Bank
(1871) 6 Ch. App. 818 .
The reason
given by the learned Additional Solicitor-General is that "shares are to
be regarded as the interest of the shareholders in the company,, measured for
the purpose of liability and dividend by a sum of money, but consisting of a
series of mutual covenants entered into by all the shareholders inter
se......... and made up of various rights and liabilities contained in the
contract, including the right to a certain sum of money." ( See Borland's
Trustee v. Steel Brothers and Co. Ltd. [1901] I. Ch. 279 Shares are different
from share scrips. Share scrips are not documents of title but only evidence of
title. it is the share register and not the share scrips which is the document
of title. (See Commissioners of Inland Revenue v. Wilson (2) (1928) 13 Tax Cas.
789. It is urged that in article 16 of the word "shares' and not share
scrips has been used. This argument of the the learned Additional
Solicitor-General has great force and had the word "lien" been used
in both article 16 and article 17, there would have been no difficulty and I
would have no hesitation in holding that the "lien" under the article
operates as an equitable charge. Difficulty has arisen because of the use of
the words " lien and charge available at law and in equity upon all shares
" in article 16, while article 17, which gives the power to sell, does not
mention equitable charge but only lien. This seems to indicate that a
distinction has been made between lien and equitable charge in the two articles
and it is only the shares subject to lien as opposed to those in which the
company had equitable charge that are to be sold under article 17. it is argued
by Mr. Chaudhuri that lien must mean something different from equitable charge.
What then can be the "lien at law" mean except the possessor lien on
the share scrips recognised by the law in this country and understood by all?
Again, the shares scrips may not be documents of title. But under the Sale of
Goods Act the shares are marketable property and goods as defined in the sale
of goods Act. When the sale of goods Act defines "goods" to mean
"every kind of movable property... and includes .... shares" it must
have meant the share scrips which can be dealt with in the bazaar as “moveable
property” it is true no share holder can be in the possession of the share
register which must be kept in the registered office of the company under the Companies
Act, but the share scrips representing the shares are themselves goods and can
be delivered to the shareholders. The company like any other person can have
possessor lien with respect to these shares scrips. It has been contended that
under the Companies Act the company cannot retain the share scrips beyond a
certain period, but this does not mean that under a collateral agreement under
the articles the company is debarred from retaining possession of the share
scrips in exercise of its possessor lien. Here in this country we are familiar
with possessor lien of the finder of the goods, of the bailees, bankers,
factors, attorneys and policy brokers, pawnees and agents under sections 168,
170, 171, 173, 174 and 221 of the Indian Contract Act and possessory lien of
the seller of goods and auctioneer under section 47 of the Sale of Goods Act.
These are important for the purpose of construction of the contract contained
in articles 16 and 17 of the company's articles of association.When, therefore,
we find in article 16 that the company will have "lien and charge avaiable
at law and in equity ", it means that the company will have lien at law on
the share scrips and equitable charge on the shares, if the scrips are not in
the possession of the company, but in the possession of the sharteholders.
Article 17 provides for the sale of shares, subject to lien only, that is, the
company will have right to sell under article 17 only the shares, the scrips of
which are in possession of the company. With respect to shares subject only to
equitable charge the right of the company to sell the shares can only be
enforced by a suit.
There is
another reason why it appears to me that the parties intended that only in
those case in which the company had possession of the share scrips and having
possessory lien, that the shares could be sold by the company under article 17
and not in the other case in which the company had no possession of the share
scrips but only an equitable charge on the share. in selling the shares the company
will be under an obligation to make over to the purchaser the share scrips. How
can this be done if the share scrips are not in the possession of the company ?
The Companies Act provides for the issue of duplicate scrips only in cases when
the share scrips are lost.
It seems to me
that the company had no. power to sell the shares under article 17 in the
instant case,because the shares were only subject to equitable charge and the
share scrips were not in the possession of the company. Article 17 gives no
authority to the directors to sell shares which are subject to equitable charge
only and the only way to enforce the equitable charge was ny instituting a
suit.
Assuming ,
however, that the lien could be enforced by sale of shares, it has to be considered
whether in the instant case the shares could be sold in terms of article 17 of
the articles. In this case the resolutions declaring lien and to sell the
shares in enforcement of the lien were passed by two directors - Dr. Mukherjee
and Dr. Neogy. So also the resolution to sell the shares to the defendant
Ramapada was passed by the same Dr. Mukherjee and Dr. Neogy. It is argued by
Mr. Chaudhury that all steps to enforce the lien by sale must be held by
directors properly and lawfully appointed, and if at the material time Dr.,
Mukherjee and Dr. Neogy were not directors then there has been a non-compliance
with the articles and the sale must be held to be invalid.
The Companies
Act and the articles provide for the appointment of directors by election in
the general meetings and by co-option. Except the plaintiff, who is the ex
officio managing director, every other director must either be elected in
general meeting of the shareholders or appointed in a board meeting. Dr.
Mukherjee and Dr. Neogy purported to act, at all material times, as elected
directors. It is very strongly urged that there has been no proper meetings of
the company and no proper appointment of directors. Dr. Mukherjee and Dr. Neogy
were not directors of the company at all. They were mere unurpers. Such
usurpers had no authority under article 17 to pass resolutions declaring lien,
determining the debt due by the plaintiff to the company, to take any steps in
enforcement of the lien by sale of shares. All proceedings beginning from the determination
of indebtedness and ending with the sale are tainted with illegality done by
and at the instance of two usurpers who were not directors of the company at
all.
To appreciate
the point made by Mr. Chaudhuri it is necessary to consider the provisions of
the Companies Act regarding meetings of the company. Section 76 of the
Companies Act provides that " a general meeting shall be held within
eighteen months from the date of incorporation and, thereafter, once at least
in every calendar year and not more than fifteen months after the holding of
the last preceding general meeting ." In default, the manager or director,
who is a willful party to the default, shall be liable to a fine sub-section
(3) provides that in default, the court may, on the application of the member
of the company, call or direct the calling of a general meeting by the company.
Section 78 provides for the calling of extraordinary general meeting on the
requisition of members. Section 79(2) provides that the following provisions shall
have effect in so far as the articles of the company do not make other
provisions in that behalf namely :
" two or
more members holding not less than one-tenth of share capital..... may call a
meeting ." In the instant case, there is article 64 of the articles of
association which provides for the calling of such an extraordinary general
meeting by five shareholders, if there are no directors capable of acting or if
there be no director.
It is
contended by Mr. Chaudhuri that in the instant case no annual general meeting
has been held for three years after December 7, 1950, till April 6, 1953.
Therefore, the annual general meeting of 1953 was bad in law and the
re-election of all the directors, namely, Dr. S.L. Mukherjee, B.P. Neogy,
S.Shangloo and Dr. Tapas Bose, was bad in law. The annual general meeting was
purported to be held in violation of the express provisions of section 76 of
the Companies Act, not to speak of the illegalities in convening the meeting by
a board of directors, which in law, did not exist on that date. The direction
elected in the annual general meeting held on december 7, 1950, in law vacated
their office fifteen months after that date, within which the next annual
general meeting should have been held. Hence all the acts of these directors
including the act of convening the annual general meeting of 1953, holding the
meeting, re-electing directors without proper nomination as provided by the
articles are invalid. Again, assuming that these directors appointed by the
general meeting held on April 6, 1953, could act as such, they in their turn
continued to be directors for fifteen months, and if no general meeting is held
thereafter, they vacated their office on July 6, 1954. After that date, the
company had no directors entitled to act as such. Thereafter, these directors
whose office had expired, cannot act as the board of directors of the company.
Such a board cannot give any order for convening any meeting of the company,
recommend for re-election of directors whose office long expired and secure
their re-election as directors without proper nomination by members by the
articles. On these grounds, it was strongly urged by Mr. Chaudhuri that the
12th, 13th, 14th, and 15th annual general meetings held on December 30, 1954,
and adjourned and held on January 6, 1955, were illegal and the election of all
the directors in the said meeting, including that of Dr. Mukherjee and Dr.
Neogy, must be held to be illegal. It is not a case of mere defect in the
appointment, but a case of no appointment at all. It is urged that in any event
from July 6, 1954 to January 6, 1955, there were no directors of the company
entitled to function and it is during this period, that is in September, 1954,
that the first essential step to enforce the lien by sale was taken by certain
usurpers pretending themselves to be directors. It is again emphasised, that it
is not a case of defective appointment but a case of no appointment at all.
The learned
Advocate-general contended that even though the annual general meeting might
not have been held as required by section 76 of the Companies Act, the company
does not cease to exist. In law, the company still exists and functions. The
mere fact that no annual general meeting is held within the period prescribed
by section 76 of the Companies Act, is not even a ground for winding up of the
company. Sub-section (3) of section 76 enables the court to direct the calling
of an annual general meeting after the period and there is no period of
limitation it follows that the court has the power of convening the annual
general meeting of 1950 in 1953 and the court normally will pass such an order
on the application of a shareholder and will not penalise the company for the
delinquencies of the directors who ceased to hold office. If such a meeting is
held pursuant to an order of the court, such an annual general meeting has the
power, amongst others, to pass the account of the years long passed and to
appoint directors for years long over. It may appear somewhat paradoxical to appoint
for persons as directors retrospectively with respect to a period long gone by.
Nevertheless, there is no reason why it cannot be done under the Companies Act.
It is clear that the persons who could be appointed as directors are persons
who actually acted as such without any legal warrant during a period long gone
and the effect of appointment would be to ratify all acts done by these
so-called directors without authority; in other words to validate all the acts
done by these directors which otherwise would have been invalid. The learned
Advocate-General has pointed out that unless this contention is accepted, all
acts done after the expiry of the period when the meeting, was required to be
convened, that is, 15 months after the last meeting all acts and transactions
of the company would be illegal; and void and the position would be
intolerable. Surely this could not have been the intention of the Legislature.
It is not
correct to say that once the period stated in section 76 of the Act is over, no
annual general meeting can be convened without the order of the court. Section
76(3) is an enabling section. But apart from it, there is no reason why the
requisite number of shareholders under section 78 or 79(2) would not be
entitled to convene an annual general meeting, which is overdue and which the
directors have defaulted in convening within the prescribed period. If certain
technicalities stand in the way, those technicalities should be brushed aside
and provided proper notice is given to all entitled to notice, the court should
uphold such a meeting and recognise as valid all acts done in that meeting,
including the appointment of directors and passing of the accounts, even though
the meeting is held without an order of the court. Even if the meeting was not
properly convened, it is nothing more than a mere irregularity and the
appointment of the directors more than a mere irregularity and the appointment
of the directors in such a meeting is nothing more than defective appointment.
Such acts of the directors must be held valid under section 86 of the Companies
Act, notwithstanding that this appointment is subsequently discovered to be
invalid because of the irregularity of the meeting in which the directors have
been appointed. In the submission of the learned Advocate-General, the law
recognises de facto director who is not a de jure director. Such de facto
director has all the powers of a de jure director and a sale of hares by such
de facto directors in exercise of the lien under the articles gives good title
to the purchaser. If the policy of law is that the company which does not hold
its annual general meeting in proper time would continue to exist and carry on
business and if there are people who, though not properly appointed directors,
nevertheless carried on the business of the company as directors the court
recognises them as de facto directors and upholds their acts as if they were
properly appointed directors.This is expressly provided for in section 86 of
the Indian Companies Act which reads as follows :
" The
acts of a director shall be valid notwithstanding any defect that may
afterwards be discovered in his appointment or qualification : Provided that
nothing in this section shall be deemed to give validity to acts done by a director
after the appointment of such director has been shown to be invalid."
The cases
cited may now be considered. In In re County Life Assurance Co. (1870) 5 Ch.
App. 288 the promoter of a life assurance company who was also named as
managing director in the articles, continued to carry on business in spite of
the fact that three nominated directors in the articles expressly prohibited
the managing director to carry on the business and themselves refused to act as
directors. The managing director thereupon proceeded to choose fresh directors
in place of those who declined to act. The company issued a number of policies
and the policies ex facie were in order and were consistent with the articles,
having been signed by three directors. The company was weaponed up and in the
winding up proceedings the question arose whether the policy was binding on the
company. The court held that it was binding.
GIFFARD L.J.,
held that an outsider was not expected to know the indoor management of the
company and could not be and was not aware that anything irregular had taken
place. The learned Lord Justice upheld the claim under the policy with the
following observation :
"The
company is bound by what takes place in the usual course of business in the
party where the party deals bona fide with persons who may be termed de facto
directors, and who might, so far as he could tell, have been directors de
jure."
It is to be
noticed that this case is one of defective or irregular appointment. The
original directors named in the articles having refused to act, the managing
director co-opted directors in their place. In the case of Mahony v. East
Holyford Mining Co. Ltd. {(1875 ) L. R. 7 H. L. Cas. 869. }, the official
liquidator of a company in liquidation sought to recover from the banker amount
paid on cheques drawn by the directors who were not directors properly
appointed. In this case also the court held that an outsider was not expected
to know the indoor management of a company so as to ascertain wheather the
director who signed the cheques in the usual way were properly appointed
directors or not. The Lord Chancellor in his speech observed as followed at
page 888 :
" I have
no hesitation in advising your Lordships, in accordance with the opinion of the
learned judges who have the attended the hearing of this case and have advised
your Lordships, that you should now hold that there having been de facto
directors of the company, who were suffered and permitted by majority of those
who signed the articles of association to occupy the position of and act as a
directors, and the bankers having in the full belief that these persons were
directors, as they were represented to be, honored the cheques drawn by them,
the payment of these cheques is an answer to the action of the liquidator of
the company, and that the judgment in the action ought to be entered for the
defendant, the public officer of the bank, and the present appeal
allowed."
LORD
CHELMSFORD at page 892 makes the following observation :
" The
first finding of the jury is that no four of the seven persons who signed the
articles of association ever agreed to the appointment of directors, or
assented to Wadge, Hoare, or Mcnally acting as such. If it is now open to the
bankers to question this finding, it may be said, that although there was no
evidence of four of the persons who signed the articles of association formally
meeting and agreeing together to such appointment, yet there was ample proof
that not four of the seven merely, but all the seven, had assented to the three
persons named acting as directors."
LORD
HEATHERLEY at page 896 bases his opinion on two grounds : (i) that the 85th
clause in the articles of association, analogous to section 86 of our Act
covers any defect that might have been in the appointment. The second ground on
which LORD HEATHERLEY found in favour of the bank is the broad equitable
principle that of the two innocent persons to suffer loss, that party must
suffer who was bound to do, or avoid any act by which the loss has been
sustained. The learned Lord Justice held that the shareholders could have taken
steps to see that things were properly done, and the bank as an outside could
have no knowledge of the indoor management and its impropriety. At page 898
LORD HEATHERLEY makes the following observation :
" Now
whose business was it to see that that was all properly done ? It was the
business of the shareholders to see that it was done, and properly done, and if
they allowed this duty to be assumed by persons who had no title to it, in their
offfice at 12 Grafton Street, the place where the office of the company was
described in the prospectus as being - if the allowed persons who were not
entitled to do it to carry on all the business of the company there- to act as
directors and as secretary there ; especially if they allowed them to perform
the most important business of drawing cheques (for they must have known their
own deed which says that that can only be done by a draft of three directors,
and they must have known that money must be had for the purposes of the
company), if there is a fault on the one side or the other, it is on the side
of those who allowed all those transactions to take place, when they were not
conducted by persons legitimately appointed on the part of the company.
On the other
hand, on the part of the bankers, I see no possible mode by which they might
have pursued their inquiries in the manner contended for at the Bar without
requiring all the minute books of the company to be produced to them, and
without conducting a detailed investigation into all the transactions of the
company as to the appointment of directors and the like - a duty were not
called upon to perform and a duty which, if it was objected to, they could not
have insisted upon performing ."
LORD PENZANCE
found in favour of the bank by applying what is known as the rule in Royal
British Bank v. Turquand (1) (1856) 6 E. and B. 327. as the following
observation in page 902 indicates :
"My
Lords, the question is a very broad one whether a bank under such circumstances
having a written authority of a de facto secretary is bound, before is acts
upon that authority to ascertain whether he is the properly constituted
secretary of the company or not, and not only that, but whether any resolutions
of which he forwards a copy was properly passed by the directors. Now, my
Lords, the case of Royal British Bank v. Turquand (1) (1856) 6 E. and B. 327,
distinctly lays down the proposition that the bank is not bound to make any
such inquiry, but that it is justified in acting upon a letter such as the one
to which reference has been made provided that the transaction which appears
upon that letter is one which might legally have taken place and been legally
consummated under the articles of association. Upon this simple ground, my
Lords, it seems to me that your lordships would be perfectly justified in
directing the judgment in this case to be entered for the defendant ".
In the
penultimate paragraph of his speech the Law Lord considered the case to be a
case of defective appointment and the act of the directors not properly
appointed is validated by the 85th clause of the articles (same as section 86
of our Act).
In this case,
no doubt, they were nor properly appointed; they appear to have had either the
formal, or the informal assent of three out of the four reasons who would have
constituted the majority necessary tom make a proper appointment; but ,
nevertheless, although not properly appointed, they would seem to have their
acts validated under the 85th clause.
In the case of
York Tramways Co. Ltd. v. Willows (1) (1882) 8 Q.B.D. 685, the company
instituted a suit against a shareholder for the recovery of the share money. At
the date of the application for allotment of shares, there were two directors
and with respect to a third director, there was a letter of resignation which
was accepted in the same meeting of the board in which allotment of shares were
made to the defendant and the defendant was co-opted as a director in the
vacancy created. According to the articles the number of the board should not
be less then three. The articles provided that the board of directors shall
regulate their meeting and determine the quorum necessary for transaction of
business. There was an article like section 86 of the Indian Companies Act. The
defendant, after being elected director took part in the meetings wherein
shares were allotted to different applicants. The defendant joined the other
two directors in writing a letter to the bank manager as to what cheques were
to be signed and honoured.After doing all these acts, the defendant withdrew
his application for shares. The company instituted a suit to recover the share
money on the footing that the defendant was a shareholder and was liable for
the share money. It was held that the defendant was liable. LORD COLERIDGE C.J.
based his decision on three points - The directors were entitled under the
articles to act by a majority. " If there were three directors the two
acted as the majority of the board. " If there were the two directors
only, the two were acting in a casual vacancy . The board does not come to an
end because a casual vacancy occurs... until Fry's resignation was accepted the
board did act by a majority allot these shares to the defendant. These
considerations are sufficient to dispose of the case and to show that the
defendant must pay the amount of the call upon these shares ." It was also
held that the defendant subsequently accepted the allotment, that the case at
best was a case of defective appointment and that the defendant was completely
estopped from stating that he was not a shareholder. The other Lords Justices
(including BRETT C.J.) took the same view and decided mainly on estoppel. This
as noted before is also a case of defective appointment.
In the case of
Newhaven Local Board v. Newhaven School Board (1) (1885) 30 Ch. D. 350, the
court held that under the Public Health Act the board does not cease to exist
because of the lack of quorum occasioned by the resignation of members of the
board and that filling up of casual vacancies was "business" within
the meaning of Schedule I, rule 2, of the Act. At page 363 COTTON L. J.
observed :
" In my
opinion, therefore, as regards the validity of the acts done by the board, rule
9 cures the defect arising from the fact that the persons elected or selected
to fill up the vacancies were chosen by two persons who, not being a quorum,
were not competent to fill up the vacancies. Therefore, in my opinion, we
cannot consider what had been done by the board, although irregularity
constituted, as being ineffectual. "
LINDLEY
L>J. was of the same opinion. He observed at page 370 :
``I was very
much struck by the argument of Mr. cozens- Hardy, that the object of this rule
was to protect people dealing bona fide with the local board without notice of
irregularity. Of course it was intended to provide for such a case but the
question is whether it is confined to such cases. I do not think that it is;
appears to me to rendered the acts of a board valid notwithstanding any defect
in the election of any of its members. I think, therefore, that whatever
irregularity there was in the constitution of the board in May, 1884, this rule
would make the election of the three who were elected in 1885 perfectly valid.
It appears to me to extend not only to protect people dealing bona fide with
the board without knowledge of the disqualification, but also to protect the
rate payers, whose guardians and trustees the local board are. I therefore come
to the conclusion that fixing the building line was a proceeding which is
rendered valid by rule 9.''
The argument
of COZENS- HARDY referred to by LINDLEY L. J., is to be found in page 357 :
`` The cases
under the Companies Act, 1862, section 67, furnish an analogy; they shew that
an outsider who knows nothing of the irregularity is safe in dealing with a
board of directors however irregularity appointed but that the case is
different where the irregularly elected board seeks to impose a liability on
others, as,e.g., by forfeiting shares. So here a contractor would have a good
claim against the board, but the case of seeking to impose a liability on
outsiders apart from contract is quite another matter."
BOWEN L.J. the
third member of the board took the same view as the other two.
In Dawson v.
African Consolidated Land and Trading Co. 1, a shareholder resisted the claim
of the company to recover share money on the ground that there were defects and
irregularities in the appointment of directors, i.e., the directors were not de
jure directors. One of the most important irregularities alleged against a
director was that he parted with all his shares and in consequence under the
articles he was not qualified to be a director. This director, however,
acquired the qualification shares six days later. When the director sold his
shares, he ipso facto vacated office under the articles. In the vacancy so
created the other directors could very well appoint him director six days after
when the director in question again acquired the qualification shares. In fact
the other directors did treat him as a director but there was no formal
appointment by passing resolution to fill up a casual vacancy. It was held that
articles 114 (same as our section 86 of the Act) covers the case and the
irregularities were trivial. LINDLEY M.R. negative the contention that the
scope of the article was restricted to transactions between the company and
outsiders and not between the company and its shareholders so that the
forfeiture of shares by the directors not properly appointed the was protected
by the articles. COTTON L.J. considered the case as nothing more than defective
appointment and as covered by the article 114.
The case of
British Asbestos Co. Ltd.v. Boyd [1903] 2 Ch. 439, is also a case of defective
appointment and the court held that the irregularities in the appointed and
subsequent acts of the directors irregularly the appointed were validated by
articles 108 and section 67 of the Companies Act. In this case, articles 89 of
the articles provided the circumstances in which the office of a directors
shall be vacated. One of the directors, Boyd, had vacated office and the
contingent irregularities were not brought to the notice of the defendant
company. The irregularities complained of consisted in acting as director, convening
meetings of the company, ordinary and extraordinary, signing balance-sheets,
recommending directors for re-election amongst others. On the finding that
there was no evidence that the directors including Boyd and Reed had not acted
in good faith in all they did, the court held that the irregularities were
condoned by section 67 of the Act and article 108 of the Companies Act (same as
our section 86).
Channel
Colliery Trust Ltd.v. Dover, St. Margaret's and Martin Mill Light Ry. Co.
[1914]2 Ch. 506, ia also a case in which the appointment of the two directors
was held to be irregular on the ground that at the time of their appointment
they had not acquired qualification shares which were subsequently allotted to
them by a board consisting amongst others of the same directors who had not yet
the qualification shares. It was held that the irregular allotment was not by
the de facto directors which validated by the Companies Act as the directors
acted bona fide which was not disputed. It was held that the provisions of
section 99of the Companies Act should be construed boradly as between the
company and its members as well as between the company and outsiders. Reliance
was placed on the observations made at page 515 and set out below. These
observations were made after pointing out that the appointed persons were not
at the moment of their appointment qualified and a slip was made. Nevertheless
acting in good faith they accepted the shares and acted and continued to act as
directors.
" The
question is whether their acts as de facto directors are protected by section
99 of the Companies Clauses Act, 1845. It has been said that in substance the
law is stated in a very short passage in Buckley on the Companies Acts, 9th
Ed., p. 169, where it is summed up in these words : it is the note to section
74 of the new Act : ' Endangering accuracy for the sake of brevity, it may be
said that the effect of this section is that, as between the company and
persons having no notice to the contrary,directors & c. de facto are as
good as directors & c. de jure'. That is the note to section 74 of the
companies (consolidation) Act, 1908, but it is equally applicable to section
99, which applies to companies governed by the companies clauses Act, 1845 .It
is now settled that this section protects acts both with regard to insiders and
outsiders, and having regard to the law as laid down by the Court of Appeal in
Dawson v. African Consolidated Land and Trading Co.,[1898] 1 Ch. 6, and to the
view subsequently of FAREWELL J., with which I must say I entirely concur, I
think that it is a beneficial construction to put upon the section. Common
sense really requires that the there shall be some provision giving legal
effect to acts in respect of the which there is a technical informality because
some slip has been made, where the acts have been done in good faith and where
the slip has occurred because the parties have not had present to their minds
the legal difficulties in the way of doing what they honestly think they are
entitled to do. "
The following
observation of COZENS HARDY M.R. at the page 512 is also to be noted :
" If
there is good faith, and I emphasize that the mere fact that the persons
claiming the benefit of the section has notice o the existence of the fact which
led to the disability is not sufficient to disentitles him to to rely upon it
if he can honestly say, ' I was not aware of the defect and the consequences of
the facts I knew, I was not aware of the disqualifaction which now exists.'
That , I think, is really the point of the case."
In the case of
Boschok Proprietary Co. Ltd. v. Fuke [1906] 1 Ch. 148, it was held that the
resolutions passed in a meeting of the company convened by a board of directors
not properly appointed were not invalid because of the irregularity in
convening the meeting. So also in the case of Browne v. La Trinidad (1887) 37
Ch.D.I., the court refused to grant an injunction restraining the company from
confirming the resolution of the board of directors removing a director. The ground
on which the court was asked to grant an injunction was that only ten minutes
before the meeting of the board the petitioner being the directors removed was
served with the notice of removal. He,however, did not object on the ground of
insufficiency of notice nor did he require another meeting to be summoned to
consider the question.
In the case of
the In re Consolidated Nickel Mines Ltd. [1914] 1 Ch. 883, the question was
whether a director who continued to act as such after the expiry of office was
entitled to remuneration as director. The court held that the directors vacated
their office on the last day on which the general meeting for the year could
have been held and were not entitled to any remuneration for the subsequent
period.
At page 888 SERGEANT
J. makes the following observation :
" A
direct on his appointment does not ordinarily step into an office which is
perpetual unless terminated by some act, but into an office the holding of
which is limited of by the terms of the articles........ The duty of the
directors was to call a meeting in 1906 and 1907, and they cannot take
advantage of their own default in that respect and say that they still remained
directors. "
In the case of
Morris v. Kanssen [1946] 16 Comp. Cas. 186 decided by the House of Lords, it
was held that section 143 of the companies Act and Table A, article 88 ( the
same as section 86 of the Indian Statute) applied only to acts done by persons
acting as directors whose appointment or qualification 7was afterwards found to
be defective. They did not cover a case where there has been a total absence of
appointment of a fraudulent usurpation of authority. The rule in Turquand's
case (1856) 6E.&B. 327, was held not to be applicable because it can only
be invoked by an outsider and not by one who was purporting to act on behalf of
the company in the unauthorized transaction. In other words, a director who
himself was a party to the irregular transaction cannot invoke the rule in
Turquand case (1956) 6E.&B. 327 in his favour. In the this case all the
cases have been reviewed and it is the last decision on the point in the
England. Mr. Chaudhury strongly relied on this decision in support of his
contention that a director whose office had expired because no annual general
meeting was held within the period prescribed was no longer a director and his
acts after the termination of office as director are not protected by section
86 ofthe Companies Act. The learned Additional Solicitor_General also relied on
his this decision in support of his argument that the defendant Ramapada Gupta,
the purchaser of the share, being an outsider is entitled to invoke the rule in
Turquand's case (1956) 6E.&B. 327. It need hardly be said that the decision
is of the highest authority.
A decision of
this court has been cited where an opinion has been expressed that a director
continues in office even after the expiry of the period during which the new
annual general meeting is ac tually held. It is the case of Kailash Chandra v.
Jogesh Chandra (1928) 32 C.W.N. 1084, A.I.R. 1928 Cal. 868, decided by a
Division Bench of this court. This was a suit under section 42 of the Specific
Relief Act for a declaration that the defendants were no longer directors of
the company and that all acts done by them were illegal and void. In the this
case the annual general meeting came to an end without electing the directors
whose term of effaced expired. The court held that the suit must fail because
the plaintiff did not claim to be entitled to any legal character or any right
as to property which had been denied by the defendants and, secondly, because
in the circumstances of the case the court should not exercise its discretion
in granting specific performance. After disposing of the appeal on the above
ground the court made the following observation at the penultimate paragraph of
the judgment :
" With
regard to the matter, the articles of association provided that the directors
should be elected annually at a general meeting. It follows,therefore, that so
long as the general meeting is not held in which the directors are to be
elected the directors elected at the previous general meeting would continue in
office. It is contended by the learned advocate for the respondent that
according to the true interpretation of the articles the directors would hold
office only for one year form the date of their appointment, and if no general
meeting is held at the lapse of one year the directors would automatically
vacate their office and the company would go on without any directors at all .
I am unable to accept this contention of the learned advocate as it seems to me
that it would be unreasonable to hold that this is the true meaning of the
articles of association. "
In the case of
Ananthalakshmi Ammal v. Indian Trades and Investments Ltd. [1952] 22 Comp.Cas.
324 , decided by a Division Bench of the Madras High Court has been held that
" the directors who were due to retire at the annual meeting next to that
held on the previous occasion should be held to have vacated office on the last
date on which the annual meeting should have been held and in consequence they
ceased to be directors after such last date." This is a decision of a very
strong Bench of the Madras High Court consisting of RAJAMANAR C.J. and
VENKATARAMA AIYAR J. and is a well considered judgment. Kanssen's case [1946]
16 Comp.Cas. 186, has been cited by the Madras High Court with approval.
The case of
Changamul v.Provinicial Bank (1914) I.L.R. 36 All 412; A.I.R. 1914 All 471,
decided by the Division Bench of the Allahabad High Court is a case in which
the liquidator claimed the balance of the share money from three shareholders.
The defence was that of the three directors who were present in the meeting of
the board, not all were properly appointed and if those not properly appointed
are left out, the meeting of the board had no quorum. It was held that this
irregularity in the allotment by reason of the fact that some of the directors
in the board meeting which made the allotment were not directors properly
appointed is condoned because of the articles as will appear in the following
observation: "But if the articles of association validate an act done by
de facto director in a bona fide manner, the court will uphold the act. "
On
consideration of the arguments advanced and the authorities cited I think that
the learned Advocate-General was right in his submission that the company
continued to exist and function even thought the annual general meeting of the
company is not held in time, that section 76 (3) of the Indian Companies Act is
an enabling section and that the shareholder has the right apart from an order
of the court under section 78 and 79(2) of the companies Act to hold a general
meeting, which may not strictly be chracterised as the annual general meeting
but is nevertheless a meeting in which all that can be done in annual general
meeting can be done including the passing of the balance-sheet and appointment
of the directors. When such a meeting is held when the year for which the
meeting is held is over, clearly no directors properly can be appointed. But if
such an appointment is made its effect would be to ratify the acts of those who
purported to act as director without being lawfully appointed. Only those acts
of the directors, however,would be deemed to be ratified by such retrospective
appointment as can be ratified in law and it should not be forgotten that
ratification only binds the principal and the act done by an agent without
authority will become binding on the principal after ratification. It has nothing
to do and cannot affect the party other than the principal on whose behalf the
agent purported to act without authority. In the instant case by the
retrospective appointment of Dr. Mukherjee and Dr.Neogy as the directors, the
company might be deemed to have ratified all the acts of Dr.Mukherjee and Dr.
Neogy leading up to the sale of the plaintiff's shares and as such the sale may
be binding on the company. Before retrospective appointments the acts of Dr.
Mukherjee and Dr. Neogy were unauthorised and hence not binding on the company.
But after appointment retrospectively those acts may become binding on the
company. But dose it become binding on the plaintiff? Dose this retification
take away the right of the plaintiff to repudiate the sale which was effected
by unauthorised persons? The plaintiff only gave authority to the directors to
sell after taking necessary steps as provided in the articles and if the sale
was effected not by directors but by some unauthorised persons the plaintiff's
right to repudiate cannot be affected by the company's ratifying the
unauthorised acts of persons who purported to act as directors, though in fact
they were not.
Again, the law
recognises that the appointment of directors may be defective in that they may
not have the qualifications as required by the articles or the provisions of
the articles of association have not strictly been complied with in the matter
of the appointment. Many acts might be done by these directors bona fide on the
behalf of the company, before this defect in the appointment is detected and
shown to the directors or company. Section 86 of the Companies Act protects
these acts of directors not properly appointed. But section 86 does not protect
the acts of directors whose office expired after the termination of office.
Kanssen's case [1946] 16 Comp. Cas. 186, and the Madras case, Ananthalakshmi
Ammal v. Indian Trades and Investments Ltd. [1952] 22 Comp. Cas.324, are clear
authorities in the support of this proposition with which 1 respectfully agree.
With respect, I am unable to subscribe to the obiter dicta of the Division
Bench of this court in Kailash Chandra v. Jogesh Chandra (1928) 32 C.W.N. 1084;
A.I.R. 1928 Cal. 868. , and noticed before.
Apart from the
acts of directors whose appointment is defective which are protected by section
86 of the Companies Act are there other acts by persons who are not directors
de jure but directors de facto protected? It has been argued that law
recognises de facto directors and as stated by Buckley and Palmer, two
recognised authorities on company law, the directors de facto are practically
the same as directors de jure and both have the same powers. In all the
authorities, however, cited before me and noticed before, the term de facto
directors has been restricted to directors with defective appointment. No case
has been cited in which the court has upheld the act of a pretended director
without any appointment. In other words in no case the terms de facto director
has been applied to a mere usurper without any appointment whatsoever. The
court has upheld the acts done by a director whose appointment is defective but
in no case it has gone further to uphold acts of one purporting to act as
director without any appointment or whose office has expired. In this state of
the law I am not prepared to accept the broad proposition of the learned
Advocate-General, that the de facto director is one who actually acts as such,
that he has the same power as a director de jure and that all acts of such a de
facto director whether appointed or not should be upheld by the court. If such
be the policy of law why enact section 86 of the companies act giving only
qualified validity to some acts not of all de facto directors but of those only
who have been appointment but whose appointment is found to be defective ? It
is to be noted that in all cases in which the court upheld the act of a
"de facto director " in which the outsider has dealt with such "
de facto director " bona fide the court did not uphold the act because it
was valid. They were held to be invalid , but the company was precluded form
raising the question of the invalidity of the acts, on the principles akin to
estoppel and holding out, only to protect the bona fide third party. I have
kept out of a consideration for the present, the acts of a " de facto
director " with whom an innocent third party deals bona fide. This aspect
of the question will be considered later.
In the instant
case I hold that on 20th and 24th September, 1954, Dr. Mukherjee and Dr. Neogy
had vacated their office as directors as fifteen months had expired after the
last annual general meeting held on April 6, 1953. The resolution determining
the liability of the plaintiff at over Rs. 4 lakhs passed on the September 10,
1954 , and the resolution passed on the September 23, 1954, to enforce the lien
and making demand of the payment and giving notice under articles 17, and the
notice served on the plaintiff in terms of the resolution dated September 24,
1954 -all these acts are not warranted by law and must be held to be illegal.
The annual general meeting held on April 6, 1953, and on January 6, 1955, were
not in compliance with the provisions of the Companies Act and the articles.
The directors whose office had expired were not competent to convene a general
meeting in such a case it would be quite competent for five members of the
company to convene a meeting under article 64 of the articles of association.
This is provided for in section 79(2) of the Companies Act. The only other way
to convene a general meeting is to hold a meeting under section 76 (3) by and
under an order of the court. In the instant case, the 12th,13th,14th and 15th
annual general meetings were convened by a defunct board of directors whose
office had long expired. They had not been convened by five members in terms of
articles 64 of the articles. These meetings, therefore, were not in accordance
with law and the appointment of directors at these meetings must be held to be
invalid. Having regard to the fact that there has been an appointment in
general meetings of the company which were not properly convened, I am prepared
to stretch a point in the favour of the defendant and hold it to be a case of
defective appointment and the acts of the directors with such defective oppointment
can be validated by section 86 of the Companies Act . In the instant case,
however, Dr. Mukherjee and Dr. Neogy are hit by the proviso, because the
invalidity of their appointment was not shown to the them before they took
steps in the matter of sale and when the sale actually took place. In the
instant case I told that Dr. Mukherjee and Dr. Neogy were not directors and if
after their a so-called election on January 6, 1955, they can be called
directors at all they were in any event directors with defective appointment
and further the defect in their appointment was shown to them. I am unable to
accept the argument of the learned Additional Solicitor-General that an usurper
of the office without any appointment or a director whose office had expired is
a director within the meaning of the Companies Act and the articles, because he
acts as such even thought he does it without any lawful authority.
Assuming again
that the 12th,13th,14th and 15th meeting were valid and good, the resolution
appointing directors for periods passed retrospectively cannot be anything more
than the ratification of acts done by those who purported to acts as directors,
provided those acts can be ratified. In my judgment Dr. Mukherjee and Dr. Neogy
were not directors at any event from July, 1954, onward having vacated their
office , and they had no authority under article 17 to declare and/or impose
and/or enforce the lien on shares and/or sell them. These are wholly
unauthorised acts and ratification of such unauthorised acts by the company
cannot take away the right of the shareholder to repudiate such unauthorised
acts.
It is next
contended by Mr. Chaudhury that assuming Dr. Mukherjee and Dr. Neogy were
directors, they as directors had no authorised to sell the shares because the
condition for the exercise of that power are lacking in the instant case. The
conditions precedent to the exercise of the powers are : (1) money must be
precedent payable (2) until a demand is made and notice given in writing
stating the amount due and (3) giving notice of intention to sell the shares in
default. But in the instant case the amount of the debt for which the shares
were sold was at its highest a claim on account and claim does not become
presently payable till a demand for payment is made. Secondly, the notice of
demand that is required to be served in writing must state the exact amount due
and payable, for which the lien is sought to the be imposed. In the instant
case even though the company may have some claim, it is nothing near the amount
demanded and for which the shares were sold. The amount stated in the notice is
over Rs. 4 lakhs whereas the liability of the plaintiff on the date would be
far less, near about Rs. 50,000. in any event not more than Rs. 81,000. It must
be held, therefore,that the conditions laid down in article 17 for the exercise
of the power of sale were absent in the instant case and therefore the same was
bad.
I am unable to
agree with Mr. Chaudhury that the debt due by the plaintiff was not
"presently payable." Holding as I do that the amount taken from the
company by the plaintiff on account from time to time represents a loan, the
debt was "presently payable " even before demanded. The other
indebtedness which I held to the be fictitious and unreal was not a debt due by
the plaintiff and as such cannot be a debt "presently payable "for
which the company can claim to have any lien. The company sought to sell the
shares for the recovery of a debt which was far in excess of what was actually
due by the plaintiff and to that extent the notice demanding payment and
threatening sale is not the compliance with article 17 of the articles and to
that extent it was wrongful. There is substance in the contetion of Mr.
Chaudhury that the language of article 17 makes it clear that non- compliance
of the conditions laid down affects the validity of the sale.
Lastly, it is
argued that the motive behind the acts of Dr. Mukherjee and Dr. Neogy was not
to realise a just debt due to the company by the plaintiff but to deprive the
plaintiff of his shares. There can be no reasonable doubt that this was the
notice that led Dr. Mukherjee and Dr. Neogy to act in the way they did, namely,
fixing the debt at a fantastic figure, declaring the shares to be subject to
lien for the payment of such debt,demanding payment immediately after Dr.
Mukherjee had occupied the saddle after ousting the plaintiff and selling the
shares with the greatest possible expedition. The motive behind these acts on
the part of Dr. Mukherjee and Dr. Neogy is clear and palpable. Mr. Chaudhury
has argued that when the motive of the directors is not to benefit the company
but to promote their own interest by driving away plaintiff from the company
such acts of the directors would not be upheld the court. In support of this
argument Mr. Chaudhury has cited the case of Nanalal v. Bombay Life Insurance
Co., [1950] 20 Comp. Cas.179 decided by the Supreme Court. In this case the
directors increased the share capital of the company with two objects in view:
(1) company needed additional capital, (2) to prevent cornering of shares by
one group, group of outsiders , namely, the Singhania group. This act of the
directors in passing a resolution to issue additionals shares was challenged on
the ground that the directors did it to protect their own position. The court
upheld the action of the directors. There was a concurrent finding of fact by
the courts below that the resolution was passed because the company needed
additional funds and that the issue of the shares was not due solely to the
desire on the part of the directors to keep themselves in the saddle. In the
opinion of Das J., " the motive to prevent the Singhania group , who were
outsiders, from acquiring control over the company cannot, as between the
directors and the company and the existing share holders, be stigmatised as
mala fide." Mr. Chaudhury relies on the following observations of Das j. :
"It is
well established that directors of a company are in a fiduciary position
vis-a-vis the company and must exercise their power for the benefit of the
company. If the power to issue further shares is exercised by the directors not
for the benefit of the company but simply and solely for their personal
aggrandisement and to the detriment of the company , the court will interfere
and prevents the directors from doing so. The very basis of the court's
interference is in such a case is the existence of the relationship of the a
trustee and of cestui que trust as between the directors and the company.”
And the
following observation of MAHAJAN J. :
“Both the
courts below have found as a fact that to a certain extent in resolving to
issue new shares the directors were actuated by a fear that the Singhania group
would capture the company and oust the present directors from their vantage
point and take control of the company itself. It was argued that this motive
was an ulterior motive and the exercise of the power by the directors to
achieve this object by the issue of further shares was an exercise of power for
the purposes for which it was not conferred. This argument would have had force
if this was the main purposes of the directors in issuing the further shares
but this is not the case here."
Mr. Chaudhury
contended that applying the principles set out above in the instant case, it
must be held that inasmuch as the sole motive of Dr. Mukherjee and Dr. Neogy in
the matter of sale of the share was to drive the plaintiff out of the company
and makes their own position safe, the sale of shares in the instant case
should not be upheld by the court. It has been contended on the behalf of the
defendants that if has been proved that at the material time the plaintiff was
indebted to the company and the shares were subject to a lien and as such
liable to be sold in exercise of the lien. The company was entitled to enforce
its legal right to enforce the lien by selling the shares. However improper the
motive of the directors might,be, the legal right of the company to sell the
shares to enforce the lien cannot be affected and the motive of the directors
has no bearing on the question . The company had a legal right and the company
enforced it . The court has no power to question the right of the company to
exercise its legal right to sell the shares in exercise of lien for a debt due
from the plaintiff as shareholder. The second point urged on behalf of the
defendant is that the motive of sale immediately on getting possession of the
company on January 24, 1956, was that the directors needed cash money to meet
heavy disbursements in the first week of the following month. Possession was
given to Dr. Mukherjee on the January 24,1956,and the company needed cash money
to the extent of a bout Rs. 1 lakh to meet heavy expenses in the first week of
February next. It is in evidence that at the time when possession was made over
to Dr. Mukherjee by the official receiver, Dr. Mukherjee got Rd. 10,000,in cash
on the same date and the company had over Rs. 7 lakhs lying in the bank in the
account of the official receiver . Dr. Mukherjee explained that he apprehended
that the official receiver would not make over the money to him and he would be
in difficulty in meeting the expected disbursement inthe first week of
February. Hence in order to get ready cash the plaintiff's shares were sold. I
have no hesitation in rejecting this evidence of Dr. Mukherjee . He had no
reason to apprehend that the official receiver would not make over the money to
him. It was the duty of the official receiver to make over the money and if the
official receiver dilly- dallied , he could have been compelled to do his duty.
The court was open and the official receiver could have been compelled to make
over the money to the company. It is further in evidence that the company was a
running concern and was doing very good business. The sale of the company's
products as stated before was Rs. 55 lakhs annually. In other words, more than
a lakh of rupees was coming to the offers of the company per week . It is
therefore impossible for me to hold that the objects of selling the plaintiff's
shares in such a hurried manner was to get cash money to run the company. There
cannot be any doubt that the sole motive of Dr. Mukherjee and Dr. Neogy who
were ruining the company was to drive away the plaintiff from the membership of
the company and deprive him of his voting right. At the date of sale of the
plaintiff and D.N. Bhattacharji had controlling shares and it was only by
depriving the plaintiff of his shares that the position of Dr. Neogy and Dr.
Mukherjee could become secure. It is significant that the preference shares of
the plaintiff were not sold. The ordinary shares of the plaintiff which carried
the voting right were sold. The motive of Dr. Mukherjee and Dr. Neogy in
selling the plaintiff's shares was not what is stated to be by Dr. Mukherjee. The
motive is clearly to deprive the plaintiff of his voting right so that he may
not have the control of the company. If, however, the directors were entitled
in law to sell the shares in enforcement of lien for a debt due to the company
by the plaintiff , the sale cannot be challenged on the ground of bad motive
directors. Every body, including a most scheming person, is entitled to enforce
his legal right and motive of the plaintiff is no defence in an action to
enforce that legal right .
If the directors
were lawfully appointed by the company in the instant case then I doubt whether
the Supreme Court decision would be assistance to Mr. Chaudhury. No doubt, the
directors were acting in a fiduciary capacity and they must act for the benefit
of the companies . But the act of recovering a debt due to the company by a
director must necessarily be of the benefit to the company and in such a case
improper motive of the directors would be immaterial and the principles laid
down in the Supreme Court case would be hardly applicable. But in this case,
the acts were not of directors de jure but only of the directors de facto and
the acts of the de facto directors are only upheld if the acts are done bona
fide in the interest of the company. If, however, the sole motive was not to
benefit the company but to promote the private interst of the de facto
directors, then the principles in the Supreme Court case would apply and the
acts of the de facto directors would not be upheld by the court.
Mr. Chaudhury
has urged that the sale in the instant case is not merely irregular but
illegal. The conditions laid down in the article 17 for the exercise of the
power of sale not having been fully satisfied, the directors had no power to
sell the shares, and the sale was illegal as being beyond the power of the
directors. It is contended in answer to this argument that they were not really
conditions restricting the power of sale given to the directors but merely an
indication as to how the power of sale was to be exercised. Hence,when the sale
takes places without complying with the "conditions " laid down the
sale is only irregular but not illegal. The power of sale was there, thought
that power was irregularly exercised, that is all .
The languages
of the articles clearly indicates that the power of sale can only be exercised
on satisfying three conditions laid down in the article 17. The language is
clear. The power given to the directors is conditional and restricted. It
follows that if the sale is effected in the breach of the conditions laid down
in the article, the directors have acted in excess of their power and therefore
the sale is invalid.
It is argued
on the behalf of the defence that this construction of article 17, namely, that
it can only be exercised after the conditions have been satisfied, will make
the power of sale illusory. The indebtedness can always be challenged by the
shareholder and simply by the challenging the indebtedness, the shareholder can
prevent the directors from exercising the power of sale . It is strongly urged
that full authority is given by the articles to the directors to sell the
shares in liquidation is of the liability of a shareholder to the company and
the directors have been given authority to determine that liability. For the
purpose of exercising the power of sale, the parties by mutual covenant have
empowered the directors to determine the indebtedness,then make demand for
payment within a week , and in default of payment within a week to sell the
shares. The parties having agreed to a summary way of recovery by the directors
of the shareholder's indebtedness to the company , this power should be
liberally construed in favour of the company . The parties are bound by their
own covenant and if it can be said on a fair reading of the articles , that
there is a covenant whereby the share holders have agreed that for the purpose
of the sale the directors would be the sole authority to determine the amount
of a shareholder's indebtedness, then certainly the shareholders are bound by
such covenant. If, however, no such covenant is to be found in either article
16 or article 17 of the articles of the company, why should the court presume
that such a wide power has been given by the share-holders to the directors. I
am not impressed by the argument that the articles should be construed
beneficially in favour of the company and hold that the shareholders have given
full authority to the directors to determine the quantum of indebtedness and to
sell the share to liquidate the indebtedness. In the absence of a clear
covenant to that effect, I will not assume that such wide power has been given
to the directors. Neither article 16 nor article 17 contains any covenant
whereby it can be said that the shareholders have agreed that the for the
purposes of sale under articles 17, whatever amount the directors choose to
decide would be the liability of the shareholder. If the construction called
for by the defendants is correct, then it follows that even though the
indebtedness of the a shareholder is far less than what is determined by the
directors the shareholder is powerless to prevent the sale and the court is
equally powerless to prevent the sale, oven if the court is satisfied that the
indebtedness is far less than what is determined by the directors. If the
amount of indebtedness as fixed by the directors cannot be challenged in court,
then a suit for injunction prior to sale must fail as a suit challenging sale
after the sale has taken place on the same ground, namely, that the directors
are the sole authority to determine the amount, and the court had no say in the
matter. This runs counter to the opinion of Palmer that the shareholder can
apply for an injunction before sale as stated in his Company Precedents 16th
Edition, page 502, " when the company threatens to sell without
justification, the existence of this clause renders it expedient for the
shareholder to apply for an injunction before the sale is effected; for, after
sale it will be difficult, if not impossible, to recover the share".
The article
referred to by Palmer is article 33 which corresponds to article 19 of our
articles of association. The relevant article in Palmer's book corresponding to
our article 17 is article 31. In the opinion of Palmer, therefore, even though
the directors have the same power of sale as is contained in our article 17,
when the sale is threatened without justification th e court can issue an
injuction. I am unable to agree that if the condition set out in article 17 is
construed to limit the power of sale, then the power of the directors to sell
in a summary way would prove to be illusory. It is argued that all that the
shareholder need do is to write to the directors in answer to the notice of
demand that the shareholder disputed the debt and then the directors, under
this construction, would be powerless to act. If the dispute raised by the
shareholder is sham and illusory, the directors may nevertheless proceed with
the sale and in the proceeding initiated by the shareholder if it is found that
the directors were right and the shareholder was wrong, nobody need bother. If
however it is found in such proceeding that there was a serious dispute and the
contention of the shareholder was ultimately upheld by the court, in such a
case the court cannot but hold that the directors had no power to sell and were
selling wrongfully. This does not mean that the power of sale given subject to
conditions is illusory. This argument advanced by the defendant seems to
suggest that power in order to be real must be absolute and that restricted and
qualified power is wholly unreal and illusory.
The terms of
the article make it abundantly clear that the power of sale was not intended to
be absolute. Sale of shares in enforcement of a debt summarily was recognised
to be very serious from the standpoint of the shareholder. Hence it is provided
that no sale shall take place unless there is a demand for payment in writing
clearly stating the amount due and giving notice that in default of payment the
shares will be sold. That is, full opportunity must be given to the debtor
shareholder to pay his debt and it is only on his failure to liquidate his
indebtedness that the shares may be sole. IT cannot, therefore, be contended
that even if no proper notice is given stating correctly the amount of
liability, but the demand is for a fantastically large amount the debtor
shareholder is bound to comply with that illegal demand and pay or otherwise
his shares would be sold. Neither the debtor shareholder nor the creditor
company could have entered into such a covenant. Such a construction is
manifestly unjust. I am not compelled by the language of the article to
construe the article in the manner suggested, on the sole ground that otherwise
the company may be prevented from selling the share and the power of sale may
prove to be illusory.
The points
discussed above would have been conclusive if the dispute involved in this
action was a dispute between the plaintiff and the company. But in the instant
case the plaintiff to succeed must displace the title of Ramapada Gupta the
purchaser of the shares. THe defendant primarily interested is Ramapada Gupta
and the real point in the suit is whether Ramapada has acquired a good title in
the shares as purchaser, that is, even if it is held that the shares were sold
by the directors improperly in excess of their power, whether this impropriety
affects Ramapada's title to the shares in any way. The company defendant is
only interested in the consequential relief of rectification of the share
register. Therefore, the most important point still remains to be considered,
namely, whether on the facts of this case and in law, the defendant Ramapada's
title has been displaced.
It is
contended that Ramapada's title is completely protected by article 19 of the articles
and section 86 of the Companies Act and even if it is held that article 19 of
the articles and section 86 of the Companies Act do not cover the case,
Ramapada is entitled to invoke the rule in Turquand's case {[1856] 6 E. &
B. 327}, in defence of his title. The argument is that however irregular and
invalid the sale may be, Ramapada is a stranger who purchased the shares bona
fide for over Rs. 2,60,000 out of which Rs. 1,30,000 was paid and on such
payment his name was entered in the share register. Ramapada, a stranger, had
nothing to do with the indoor management of the company. He cannot be expected
to know that the de facto directors who purported to sell the shares were in
fact not de jure directors and as such had no right to sell, that the debt for
which the lien was imposed and in enforcement of which the shares were sold was
not as much as was claimed by the company and that the conditions laid down in
article 17 had not been complied with. These are matters of indoor management
which are beyond the knowledge of Ramapada and he was not expected to know of
it. He as a stranger was entitled to presume that the directors who acted in
the matter were de jure directors, that all things were properly done in the
matter of determination of liability, imposition of lien and enforcement of the
lien by sale of shares. If anything irregular was done by the directors that
cannot affect the title of Ramapada Gupta as purchaser.
The case of
the defendant Ramapada Gupta has been argued with rare forensic ability and I
may state at once that no litigant got better legal assistance that what the
defendant Ramapada Gupta got in this case. I need hardly say that the arguments
advanced on behalf of the defendant Ramapada Gupta deserve very careful and
serious consideration and to the best of my ability I have tried to appreciate
them.
Assuming that
the transaction resulting in the sale of shares is illegal in the sense that
the directors under the articles had no power to sell or that the sale had been
effected by directors with defective appointment or that the sale was effected
without satisfying the conditions laid down in article 17 or that one important
step in the transaction, namely, the determination of the liability and
decision to enforce the lien by sale of the shares and giving notice required,
was taken by those who at the time had ceased to be directors, then the
defendant Ramapada can only protect his title as purchaser at such sale either
under section 86 of the companies Act, or article 19 of the articles or by
invoking the rule in Turquand's case {[1856] 6 E. & B. 327}. In each of
these cases, however, the sale will not be upheld by the court unless the party
seeking the assistance of the court acts bona fide. An innocent purchaser will
be protected. But the court will never come to the assistance of a purchaser
who purchases the share without good faith, that is, with notice that the sale
was wrongful. No case has been cited wherein the court upheld a wrongful or
illegal sale in which the purchaser had notice of its illegal character. On the
other hand, in all the cases cited on analogous sections and articles of the
English Act the English courts have held that the person seeking protection of
the court must act bona fide. So also acting bona fide is considered to be
essential to uphold a transaction in all cases cited in which the rule in
Turquand's case {[1856] 6 E. & B. 327} has been invoked to protect an
unauthorised act.
The first
point to be considered with reference to the case of defendant Ramapada Gupta
is - has Ramapada been proved to be an innocent purchaser ? If it is held
otherwise, Ramapada's defence totally collapses. Ramapada does not not,
however, come to the box and pledge his oath that he is an innocent purchaser.
Throughout this long drawn litigation, which is bitterly fought on every point
and the most important question, if not the only one being whether the
defendant Ramapada had acquired title in the shares, Ramapada is conspicuous by
his absence. His battle is fought in court by Dr. S.L. Mukherjee, and I must
say, ably fought with his back to the wall. Mr. Subimal Roy in his opening of
the case commented that Dr. S.L. Mukherjee, who was brought in the company by
the plaintiff and was given such a high position in the company with an
employment that is to be envied by all, did not prove loyal to the plaintiff.
That cannot be said of Dr. S.L. Mukherjee with reference to the defendant
Ramapada Gupta. Nobody could have done more to Ramapada Gupta in this
litigation than what Dr. Mukherjee did for him. Nevertheless, the fact cannot
be ignored that Ramapada Gupta gave this court a wide berth and did not step
into the witness box to protest his innocence. It looks as if we are having the
drama of Hamlet played in court, with Hamlet's part left out. The importance of
this fact was properly appreciated by the legal advisers of Ramapada. It must
have been realised that unless satisfactory explanation for not calling
Ramapada as a witness is given, which is acceptable to the court, the consequence
would be serious. No shelter has been taken by the learned counsel behind the
conventional ground of sudden illness or being called away suddenly on urgent
piece of business, often taken and seldom accepted by the court. A very bold
stand is taken that Ramapada has been advisedly withheld from the court,
because Ramapada has been advised that his evidence is not necessary. The
reasons given for taking this attitude have now to be very carefully
considered.
It is urged,
in the first place, that on the plaint Ramapada Gupta has no case to meet. The
suit as against Ramapada Gupta must be dismissed in limine. This argument is an
argument on pleadings. I have gone through the plaint very carefully. The
drafting of the plaint may not be artistic and leaves considerable scope for
improvement. But I am unable to hold that the plaint does not disclose a cause
of action against the defendant Ramapada, so that I should dismiss the suit in
limine as against Ramapada. The plaint does state the various acts leading up
to the sale of the shares and the rectification of the share register by
substituting the name of Ramapada in place of the plaintiff as the holder of
these shares. It is then alleged that the defendant Ramapada "connived and
/ or otherwise conspired with Drs. S.L. Mukherjee and B.P. Neogy in effecting
the said purported sale and in entering his name in the books of the
company". Then in paragraph 20 it is alleged "despite having
knowledge of the fraudulent character of the transaction of the said purported
sale of shares by the said Dr. S.L. Mukherjee and Dr. B.P. Neogy to him"
the defendant was about to exercise his right as the holder of the shares. Then
in paragraph 21 is set out the various grounds why the sale is illegal and
void. Amongst the grounds taken are (i) that the sale is fictitious, that is,
it is a colourable transaction and not a real transaction;b and and (ii) the
defendant had all along knowledge of the wrongful character of the transaction.
These are, in my judgment , sufficient to base a cause of action against the
defendant Ramapada. The allegations amount to this that Ramapada did not act
bona fide in the matter and that he is not an innocent purchaser. Further, the
sale is a colourable transaction. Such allegations are enough to dispute
Ramapada's title to the shares. It is urged that the words "fraud",
:conspiracy" and :connivance: have been used against Ramapada, but no
particulars have been given. I do not agree. Sufficient particulars have been
given to found a case of fraud and conspiracy against Ramapada; the fraud
consists in this that Ramapada has been a party to an illegal and wrongful
sale, inasmuch as he purchased the shares with full knowledge that the
transaction was wrongful. No further particular was necessary or possible to be
given beyond what is alleged in the plaint. It has been argued that no doubt it
has been alleged that the defendant Ramapada had knowledge of the wrongful
character of the transaction, but that he acquired this knowledge after the
sale and not before. If Ramapada came to know the wrongful character of the
transaction, after purchasing the shares, then this knowledge would not affect
his bona fides in the matter of purchase. But to me the allegations in the
plaint clearly amount to knowledge from prior to sale. After fully setting out
the facts tin support of the case that the sale was wrongful and without
authority, it is alleged that the defendant Ramapada "connived and/or
otherwise conspired with Mukherjee and Neogy in effecting the said purported
sale". This amounts to an averment of knowledge prior to the transaction.
Without knowledge prior to the sale, there can be no connivance, no collusion
and no conspiracy. If cannot, therefore, be held that the plaint does not
disclose any cause of action against the defendant Ramapada Gupta and that in
consequence the defendant Ramapada Gupta had no case to meet.
It is next
argued that assuming that the plaint does disclose a cause of action against
defendant Ramapada Gupta, nothing has been proved against him in the
proceedings. The plaintiff who is the only witness on his behalf stated that he
never knew Ramapada nor does he know him now. There being no evidence led by
the plaintiff to prove that Ramapada had prior knowledge of the wrongful
character of the sale there was no occasion for Ramapada to give rebutting
evidence. The argument is that the presumption of law is in favour of the
defendant, Ramapada, namely, that he acted in good faith in the transaction.
That presumption has to be rebutted by the plaintiff in the first place by
leading evidence to prove that there was bad faith on the part of ramapada. The
plaintiff has tendered no such evidence to rebut the presumption. Hence the
presumption in favour of defendant Ramapada to the effect that he acted in good
faith has not been displaced and still remains. It follows that the defendant
need not tender evidence to prove his bona fides, legal presumption being in
his favour, and this presumption has not been rebutted by any evidence tendered
by the plaintiff.
It is argued
with great force that the plaintiff is to make out his title to the shares. The
entry in the share register that the defendant Ramapada is the owner of these
shares established Ramapada's prima facie title this. The plaintiff, in order
to establish his title, must displace Ramapada's title. The plaintiff, can
prove by establishing that he was the prior holder of these shares, that the
sale effected by the company was unauthorised and wrongful and that the
defendant Ramapada did not act in good faith in the transaction. In order to
make out his title, therefore, the plaintiff has to prove, inter alia, that the
defendant Ramapada did not act bona fide in good faith. Even though this is a
negative fact, nevertheless, the plaintiff must prove it to establish his
title. In support, the following observation of BOWEN L.J. in the case of
Abrath v. North East Railway Co. {[1883] 11 Q.B.D. 440}. was relied on. The
observation was made in a case of malicious prosecution and reads as follows :
"Now in
an action for malicious prosecution the plaintiff has the burden throughout of
establishing that the circumstances of the prosecution were such that a judge
can see on reasonable or probable cause for instituting it. In one sense that
is the assertion of a negative, and we have been pressed with the proposition
that when a negative is to be made out the onus of proof shifts. That is not
so. If the assertion of a negative is an essential part of the plaintiff's
case, the proof of the assertion still rests upon the plaintiff. The terms
`negative' and `affirmative' are after all relative and not absolute. In
dealing with a question of negligence, that term may be considered either as
negative or affirmative according to the definition adopted in measuring the
duty which is neglected.”
The point
emphasised is that the plaintiff has not discharged this onus, even though it
is the onus of proving the negative. Hence there was no necessity for the
defendant Ramapada to give evidence in this case. On the basis of the evidence
tendered, if the plaintiff has failed to prove that the defendant Ramapada did
not act bona fide in good faith, and this being one of the essential facts to
be proved in support of the case of the plaintiff, the observation of BOWEN
L.J. above referred to applies with full force to the facts of this case.
In the instant
case the want of bona fides on the part of Ramapada consists in his knowledge
that the act of the directors in selling the shares was unauthorised and
wrongful. That knowledge can be proved by tendering positive evidence. For
instance, it may be proved that Ramapada made an admission that he had
knowledge prior to sale that the sale was unauthorised and wrongful. That would
be direct evidence on the point, though it must be considered that rarely such
evidence of the state of mind is available. In any event, no direct proof of
Ramapada's knowledge has been tendered in this case. The evidence is that the
plaintiff did not even know the defendant Ramapada. It must be held, therefore,
that there is no direct evidence to prove that the defendant Ramapada had
knowledge of the wrongful and illegal character of the transaction. The other
way of proving knowledge is to establish facts and circumstances from which an
inference can be drawn that the defendant Ramapada had such knowledge. In other
words, the fact of Ramapada's knowledge can be established by circumstantial
evidence. This proposition is not disputed. It has, however, been strenuously
argued that the circumstantial evidence must be such as to lead to one and the
one conclusion namely, that Ramapada had knowledge,. If the evidence is equally
consistent with knowledge had knowledge. If the evidence is equally consistent
with knowledge and want of knowledge, then the circumstantial evidence tendered
must not be held to be sufficient to establish Ramapada's knowledge of the
wrongful or illegal character of the transaction. Certain decisions on criminal
cases of fraud and conspiracy have been cited in support of the proposition that
to prove fraud and conspiracy by circumstantial evidence, the circumstances
must point to one and the one conclusion namely, that the accused is guilty. IT
is argued that in all cases of fraud the same rule will apply, it matters not
whether the case is civil or criminal. It should not be forgotten, however,
that in a criminal action, the accused is not required to depose in this favour
and if he does not, no inference against him can be drawn, while in a civil
action a defendant charged with fraud is entitled to give evidence and indeed
required to give evidence, more particularly, when the fraud consists in the
knowledge of a wrongful act in which he is alleged to be a party, and if the
defendant withholds his own evidence the court is required to draw an adverse
inference.
In the instant
case, what are the facts admitted and proved. It is admitted in the written
statement that the defendant had knowledge of certain facts relating to the
shares prior to his purchase. He had knowledge of the proceedings in this court
in suit No. 3112 of 1954 and the proceedings in appeal No. 56 of 1956 from the
order of injuction passed by P.B. MUKHERJI J. in suit No. 3117 of 1954. He had
knowledge of the termination of the suits by withdrawal and also of the appeal.
He had also knowledge that under an order of the court of appeal the official
receiver made over possession of the company to the board of directors
consisting of Dr. Mukherjee, Dr. Neogy and D.N. Bhattacharjee. This order was
passed in appeal No. 56of 1955, which was an appeal from an interlocutory order
in suit No. 3117 of 1954. Apart from this admission, other facts have been
proved in court by Dr. Mukherjee. The defendant Ramapada on 10th January came
and saw Dr. Mukherjee and intimated his desire to purchase the shares of the
plaintiff. Defendant Ramapada was not interested in purchasing other ordinary
shares that were clearly available on that date. The defendant Ramapada took
away the papers in connection with he litigation and on the following day made
an offer in writing to purchase the shares. The letter containing the offer
dated January 11, 1956, was not originally disclosed and the genuineness of the
letter was questioned by the plaintiff in court. On the 24th, shares were sold
to the defendant Ramapada and in the evening a part of the purchaser price
amounting to Rs. 1,30,000 was paid in cash. The cash money thus paid was never
proved to have been deposited in bank. The name of the defendant was
immediately entered on the share register as the owner of this big bunch of
shares in place of the plaintiff and there was no transfer deed. The defendant
Ramapada was appointed a director even before he had paid the price of shares.
Dr. Mukherjee has not been cross-examined by Ramapada Gupta and it must be taken
that he has accepted this evidence of Dr. Mukherjee. These facts do suggest
that the defendant Ramapada was well known to Dr. Mukherjee, had knowledge of
facts resulting in the sale of shares and that that knowledge he had acquired
before the actual sale took place. The extent of this knowledge of facts can
only be ascertained by the court from the evidence of the defendant himself.
The court can only determine whether he was an innocent purchaser after hearing
his testimony. I do not understand how else can the court hold that the
defendant is an innocent purchaser. The very fact that the defendant Ramapada
refused to give evidence of his innocence in court is itself a very important
fact and the court is bound to infer from this fact that defendant Ramapada had
guilty knowledge. Certain presumptions are no doubt available in favour of the
defendant Ramapada. Certain presumptions are also available against him and one
of such presumptions resumptions is that the court must draw adverse inference
against him from the fact of his refusal to swear his innocence in court. In my
judgment, it is fatal to the case of Ramapada.
In the instant
case the fact to be ascertained or proved is that state of mind of the
defendant Ramapada, that is, whether prior to the sale, he had knowledge of the
wrongful character of the transaction. This was within the special knowledge of
the defendant Ramapada and the burden of proving the innocent state of his own
mind is within the special knowledge of him alone. It was for him to prove it.
Assuming that the initial onus is on the plaintiff to lead some evidence, the
burden of proof is shifted to the defendant Ramapada, having regard to the
admission in the written statement of Ramapada that he had some knowledge
anterior to the sale and having regard to the evidence already tendered. In
determining whether the onus has shifted to Ramapada, the evidence to be taken
into account is the entire evidence tendered and not the evidence tendered on
behalf of the plaintiff alone. Very slight evidence, if at all, is necessary to
shift the burden on Ramapada and I hold that such evidence was tendered. It was
imperative for the defendant Ramapada to tender his evidence as to the quantum
of his knowledge of the transaction resulting in the sale of shares and to
prove that he was an innocent purchaser. On ramapada's failure to tender
evidence in support of his own innocence, it must be held that Ramapada had
full knowledge of the entire transaction resulting in the sale of shares and on
my finding that the transaction was wrongful I am bound to hold that the
defendant Ramapada did not act bona fide in the impunged transaction. This
finding negatives the argument made on behalf of Ramapada that his purchase is
protected by section 86 of the Companies Act and/or by article 19 of the
articles of the company or by the rule in Turquand's case {[1856] 6 E. & B.
327}.
Let me,
nevertheless, consider how far the sale is protected on the basis of this
argument. I have held that at the time when the resolution to enforce the lien
by sale of the shares was passed on September 23, 1954, and the notice in terms
of article 17 was served on the plaintiff pursuant to that resolution on
September 24, 1954, the directors who purported to act in the matter, that is,
Dr. Mukherjee and Dr. neogy, were no longer directors, their office having
expired in July, 1954, that is fifteen months after the last annual general
meeting held in April, 1953. This resolution and notice sent thereunder is,
therefore, not protected by section 86 of the companies Act, because in law the
section validates only the acts of directors with defective appointment but not
of those with no appointment or whose office had expired. Even if the section
applied, the defendant Ramapada must be deemed to have discovered the defective
nature of the appointment of Dr. Mukherjee and Dr. Neogy having regard to the
letter of the plaintiff and his solicitor served previously to the effect that
Dr. Mukherjee and Dr. Neogy had vacated their office, which letters are
included in the records of this suit in the various proceedings in this court.
The shares were sold on January 24, 1956. Previously in the annual general
meeting held on January 6, 1955, Dr. Mukherjee and Dr. Neogy were appointed
directors. Even if if is held that at the time when the sale took place Dr.
Mukherjee and Dr. Neogy were properly appointed directors and even if at that
particular date they had not discovered that their appointment was invalid,
even then the sale cannot stand, The reason is that the actual sale on January
24, 1956, is only a part of the whole transaction. The transactions ultimately
resulting in the sale consist of three steps; one, resolutions to enforce the
lien by sale passed by the board of directors; second, notice of sale under
article 17, and then the actual sale on January 24, 1956. THe resolution and
the notice are essential steps in the matter and, as stated before, these acts
of the directors are nor protected. It follows that even though the sale was
held by directors properly appointed, the case is not covered by section 86 of
the Act, because the two essential preliminary steps were taken by people
pretending to act as directors, but who were no longer directors, they having
vacated their office. In my judgment article 19 of the articles does not
protect the sale. The purchaser can only invoke article 19, if he acts bona
fide and is an innocent purchaser. I have held further, that the shares liable
to be sold under article 17 are only shares subject to lien, that is, with
respect to which the defendant company were in possession of share scrips. In
the instant case, the shares were only subject to equitable charge and the way
of enforcing the equitable charge is not by sale under article 17 of the
articles. Further conditions laid down in article 17 were conditions precedent
to the exercise of the power of sale and, in the instant case, the conditions
have not been fully complied with. I am in doubt whether this only amounts to
"irregularity or invalidity in the proceedings in reference to the
sale" within the meaning of article 19.
The rule in
Turquand's case {[1856] 6 E. & B. 327}, as stated in Halsbury's Laws of
England, Hailsham Edition, Volume V, page 423 and quoted in Kanssen's case
{[1946] 16 Comp. Cas. 186}, is in the following terms:
"But
persons contracting with a company and dealing in good faith may assume that
acts within its constitution and powers have been properly and duly performed
and are not bound to enquire whether acts of internal management have been
regular".
This
presumption of regularity in the internal management of the company in favour
of an outsider dealing with the company is due to the fact that an outsider has
no right to look at the indoor management of the company. This rule has been
followed in a number of decisions some of which have been already noticed. THis
rule of indoor management was also applied by a Division Bench of the Bombay
High COurt in the case of Pudumjee and Co. v. N.H. Moos {A.I.R. 1926 Bom. 28},
with the following observation:
"Persons
contracting with the company are bound to know, or are precluded from denying
that they know, the constitution of the company and its powers as given by
statute and memorandum and articles but they are not affected with notice of all
that is contained in the register of directors kept as required by section 87
of the Act . Notwithstanding the provisions of section 87, the appointment of
directors still remains part of `the indoor management' of the company and it
would hardly conduce to the facility of business if outsider were compelled to
search the register and find for themselves whether a person who was permitted
to act as director of the company for some length of time was also its director
de jure".
The learned
Additional Solicitor-General argued with force that this rule of indoor
management is a salutary rule and however irregular the indoor management might
have been, a total outsider is protected even if the acts of persons who were
permitted to act as directors for some length of time were not de jure
directors and even if such acts were not authorised. The outsider who acted on
the faith of apparent state of affairs which were all in order was entitled to
assume that they were the real stated of facts. Therefore, the acts of de facto
directors, who were not regularly appointed, even though they acted as
directors and had acted in a manner not regular, will be binding on the company
in favour of an outsider in his dealings with the company. A shareholder who
took no steps to prevent a de facto directors, though not properly appointed,
from acting on behalf of the company will not be entitled to challenge the
unauthorised act of a de facto director who was not a de jure director as is
clear from the speech of LORD HEATHERLEY in Mahony's case {[1875] L.R. 7 H.L.
869}, and noticed before. It is also argued that the outsider will not lose the
protection unless he is aware not merely of the fact but their legal
consequence, as is clearly indicated by LORE COZENS HARDY M.R. in the Channel
Colliery Trust case {[1914] 2 Ch. 506, 512}.
"It has
been argued for the appellants with great force that this is a clause which
ought not to be relied upon by persons who were aware of the facts, although
not aware of the legal conclusions resulting from those facts, because such
persons must be taken to know the law, and it would be wrong that they should
take the benefit of section 99. I am quite unable to accept that view. It seems
to me that the questions may be put very shortly: Aye or no, were the parties
in the transaction acting in good faith? If they were, section 99 ought to be
available for all parties including the directors themselves. IF there is a
lack of good faith, then of course the court will not allow those who are
lacking in good faith to take the benefit of it".
The test,
therefore, is the presence or absence of good faith.
The reasons in
support of the rule in Turquand's case {[1856] 6 E. & B. 327} have been
stated by LORD SIMONDS in Kanssen's case {[1946] A.C. 459; 16 Comp. Cas. 186,
186} :
"One of
the fundamental maxims of the law is the maxim omnia praesumuntur rite esse
acta. It has many applications. In the law of agency it is illustrated by the
doctrine of ostensible authority. In the law relating to corporations its application
is very similar. The wheels of business will not go smoothly round unless it
may be assumed that that is in order which appears to be in order. But the
maxim has its proper limits. An ostensible agent cannot bind his principal to
that which the principal cannot lawfully do. The directors or acting directors
or other officers of a company cannot bind it to a transaction which is ultra
vires. Nor is the only limit its application. It is a rule designed for the
protection of those who are entitled to assume, just because they cannot know,
that the person with whom they deal has the authority which he claims. This is
clearly shown by the fact that the rule cannot be invoked if the condition is
no longer satisfied, that is, if he who would invoke it is put upon his
inquiry. He cannot presume in his own favour that things are rightly done if
inquiry that he ought to make might tell him that they were wrongful
done".
This being the
rule in Turquand's case {[1856] 6 E. & B. 327} the party seeking to invoke
the rule has to prove that he dealt with the company bona fide in relation to
the offending transaction. In the instant case, the defendant Ramapada Gupta,
in order to invoke the rule in Turquand's case {[1856] 6 E. & B. 327}, has
to prove that he purchased the shares without knowing the wrongful nature of
the transaction. In other words, he has to establish the allegation made in his
written statement that "fully relying on the facts set out in the earlier
part of paragraph I" of his written statement, defendant Ramapada
"bona fide purchased the shares at par". This is a positive defence
and it is for the defendant Ramapada to substantiate it. Defendant Ramapada
cannot substantiate it without entering the witness box. Not having done it, he
has not laid the foundation for invoking the rule in Turquand's case {[1856] 6
E. & B. 327}. Again, as stated by LORD SIMONDS, there are limits to the
application of this rule and this rule is designed for the protection of those
who are entitled to assume, just because they cannot know facts happening
"indoor of a company". But in the instant case, the facts happening
indoor of the company are no longer confined indoor. They have been brought out
in court. The defendant Ramapada admits some knowledge of the court proceedings
and, therefore, what has happened indoor from those court proceedings. Where is
the room for assumption in such a case when what was happening indoor can be
known and is admitted to be known to the party to a certain extent. Knowledge
is admitted by Ramapada. The only question is, how much he knew or could have
known.
Another point
has been raised and has to be considered and that is this : Does the rule in
Turquand's case {[1856] 6 E. & B. 327} apply to a case in which the dispute
is in the title to shares between two rival claimants, even though the dispute
has arisen because of the act of the company ? The rule applies in the case of
a dispute between an outsider and the company. But the instant dispute is not a
dispute between the company and Ramapada, but a dispute between the defendant
Ramapada and the plaintiff. The rule in Turquand's case {[1856] 6 E. & B.
327} may prevent the company from disputing the title of Ramapada to the
shares. But can it be invoked by Ramapada to defeat the plaintiff's title to
the shares? The question is certainly not free from difficulty. The shareholder
in law is distinct from the company and the shares are his property. The
articles which crete a lien and charge constitute nothing more than covenants
between the company and its shareholders. If the shares are sold in breach of
the covenants the shareholders may yet covenant, as he has done in the instant
case, that the sale will not be set aside, because of any irregularity or
invalidity in connection with the sale. This is article 19 of the articles of
association of the company. If the shares are wrongly sold, the plaintiff may
be debarred from questioning the purchaser's title by reason of the covenant
contained in article 19. But if the case is not covered by article 19, can the
title of the shareholder in the shares sold in breach of the covenant be
defeated by the purchaser by invoking the rule in Turquand's case {[1856] 6 E.
& B. 327} ? In none of the cases cited the private right of property in the
shares of a particular shareholders was involved. In Turquand's case {[1856] 6
E. & B. 327} the dispute was between the outsider and the company. So also
in Mahony's case {[1875] L.R. 7 H.L. Cas. 869}. The case of Channel Colliery
Trust {[1914] 2 Ch. 506}, is a case of allotment of shares by directors not
properly appointed and the dispute was between the company and the allottee,
that is, the company and outsiders. In the case of British Asbestos Co. {[1903]
2 Ch. 439}. the legality of a general meeting and the election of directors in
that meeting was the subject of controversy. In Dawson's case {[1898] 1 Ch. 6}
the legality of a call on shares made by directors not properly appointed was
the dispute. So also York Tramway Co. Ltd. {[1882] 8 Q.B.D. 685} was a case in which
the company sought to recover call money on shares and the defence was that the
call was made by a board of directors not properly appointed. The Bombay case
{A.I.R. 1926 Bom. 28} is also a case in which the right of a creditor to rank
as secured creditors in winding up was in issue. THe instant case appears to be
a case of first impression on the point. The point is that if a company
wrongfully sells a chattel deposited with it by one of its shareholders, can
the rule in Turquand's case {[1856] 6 E. & B. 327} be invoked by the
purchaser in a suit by the shareholder to recover from the purchaser the
chattel ? If not, why should the rule in Turquand's case {[1856] 6 E. & B.
327} be invoked by the purchaser, if the chattel happens to be the share of the
company ? I am not prepared to say that there is no substance in this
contention. On the other hand, the reasoning in some of the cited case may be
used in support of the contention that the rule in Turquand's case {[1856] 6 E.
& B. 327}, may apply in such a case. The point is important and, as stated
before, it is a point of first impression and need not be decided in this case,
having regard to the view I have taken otherwise. Admitting the rule in
Turquand's case {[1856] 6 E. & B. 327}, and applying it to the facts of
this case, what follows ? The rule in Turquand's case {[1856] 6 E. & B.
327} fixes on the outsider dealing with the company notice of the memorandum
and articles of association. Ramapada, therefore, in the instant case, is, in
any event, fixed with the knowledge of article 17. I have held that article 17
gave no power to the directors to sell the shares with respect to which the
company had no lien in terms of the articles. From the letter of Ramapada to
the company it is clear that Ramapada knew that the shares scrips were not
available at that point of time. Hence, even if under the rule in Turquand's
case {[1856] 6 E. & B. 327} the defendant Ramapada as a total outsider may
be entitled to assume that the directors were properly appointed, that the
directors properly determined the liability of the plaintiff, that all steps
were taken by the directors properly, that is, the conditions laid down in
article 17 have been complied with, he was not entitled to assume that the
directors had power to sell, Article 17 of which he must be deemed to have
notice, gave no power of sale of shares with respect to which the company had
no lien at law but only equitable charge. Hence the rule in Turquand's case
{[1856] 6 E. & B. 327} is of no avail to Ramapada.
It has been
strenuously urged that the defendant Ramapada had no doubt knowledge of the
allegations made by the plaintiff inthe various suits disputing the right of
Dr. S.L. Mukherjee and Dr. Neogy to sell the shares in suit No. 3112 of 1954. But
the suit was withdrawn without leave to instituted another suit and with the
withdrawal of the suit the challenge thrown out in the suit was withdrawn. In
such circumstances, the defendant Ramapada was entitled to think that the
objection of the plaintiff questioning the right of th directors to sell the
shares in enforcement of the lien was wholly unsubstantial and if on that
belief the defendant Ramapada purchased the shares, he purchased the shares
bona fide and there was no absence of good faith on his part. This is a defence
in the nature of estoppel - the defendant Ramapada was misled by the conduct of
the plaintiff in withdrawing the suit to believe that the allegations made by
the plaintiff in the suit were without any substance and on the faith of that
purchased the share. This argument would have been of great force if the case
was substantiated by evidence. If Ramapada gave evidence to that effect, I
might very well have accepted it and held that the defendant Ramapada purchased
the shares bona fide. In the absence of Ramapada's evidence, this argument
becomes wholly unreal and is of no avail to him.
The reason of
the plaintiff not persisting in the suit filed and withdrawing the same will
appear from the petition of withdrawal of the defendant company in suit No.
3117 of 1954. In suit No. 3117 of 1954 the company was one of the plaintiffs.
This petition is signed by the company in this manner: "Albert David Ltd.,
by the pen of Albert Judah Judah, Managing Director". In this petition the
reason of withdrawing the suit is stated to be this :
"An
amicable settlement has been effected between the plaintiff in the present suit
and D.N. Bhattacharjee and these two together hold the controlling shares. In
consequence even though the allotment of new shares are recognised, the
interest of the plaintiff would be protected. Hence to put an end to the
litigation the suit is being withdrawn".
No separate
petition was filed to withdraw the suit no. 3112 of 1954. But the two suits
were withdrawn together at the same date. The defendant Ramapada, who admits to
have some knowledge of the proceedings in court, might or might not have
knowledge of the proceedings in suit No. 3117 of 1954. There is no evidence to
this effect, but the probabilities are that he had knowledge and if he had
looked into the petition, he could have known the real reason of withdrawal of
the suit. Further, in the petition before the appeal court for delivery of the
company to the plaintiff's party it was clearly stated that they were the proper
party to whom possession was to be made over by the official receiver and not
to Dr. Mukherjee and Dr. Neogy. The court, however, held that possession was to
be made over to the party from whom possession was taken. This conduct of the
plaintiff cannot be construed to mean that he gave up the claim that he had
made and has made up till now. In any event, Ramapada, as the intending
purchaser, was put upon enquiry and if he refused to make enquiry and
deliberately shut his eyes to the true state of affairs, he did it at his own
risk, he is not entitled to complain that he did not know the real state of
affairs. In the light of these facts the defendant Ramapada Gupta might or
might not have been justified in thinking that the fact of withdrawal of the suit
amounted to the plaintiff's giving up the charges against Dr. Mukherjee and Dr.
Neogy. But the point is, what in fact was the state of mind of Ramapada, what
was the knowledge with which he purchased the shares ? That is the real point.
On the point, the withdrawal of the suits and the records and proceedings are
no doubt relevant materials but certainly not conclusive. In that view of the
matter, it was imperative for the defendant Ramapada to come to court and state
his knowledge of facts on the basis of which he purchased shares. Not having
chosen to give evidence, it is not open to him to argue that the withdrawal of
the suits led him to believe that the plaintiff's contention raised in suit No.
3112 of 1954 to be of no substance from the fact that the plaintiff withdrew
the suit without liberty to institute another suit and on that belief purchased
the shares. This may or may not be true, and whether it is so or not can only
be ascertained from the evidence of the defendant Ramapada, if it was tendered.
As I stated before the refusal of the defendant Ramapada Gupta to tender his
evidence in this case is fatal to his case.
Another point
taken by Mr. Chaudhury is that in the instant case, there is no instrument of
transfer, i.e., no deed transferring the shares to the defendant Ramapada
Gupta. The plaintiff the registered holder of the shares did not execute any
such deed. Nor does it appear that the company did execute any such deed for
and on behalf of the plaintiff. No need of transfer has been proved in court on
behalf of any of the defendants. It is contended that section 34(3) of the
Indian Companies Act provides that it shall not be lawful for the company to
register a transfer of shares unless the proper instrument of transfer duly
executed by the transferor and transferee has been delivered to the company
along with the scrip. No transfer deed having been executed and no scrip having
been made over to the company in the instant case as required by section 34(3),
it was not lawful for the company to register the transfer and record the
defendant Ramapada Gupta as the holder of these shares. It follows that even if
there has been a sale in favour of the defendant of the shares in suit, in the
absence of a deed of transfer duly executed and deposited with the company the
company had no power to register Ramapada as the holder to these shares. It is,
therefore, urged by Mr. Chaudhury that there must be rectification of the share
register by restoring the plaintiff's name as the holder of these shares. It is
to be remembered that in the instant case, the shares have not been forfeited
and the company was not selling its own shares, in which case no transfer deed
would be necessary. The company in the present case was selling the shares of
the plaintiff and hence in law a deed of a transfer becomes imperative to
enable the directors of the company to register Ramapada as the transferee of
these shares. This is the argument of Mr. Chaudhury.
In answer to
this argument it is contended on behalf of the defendants that article 19
provides for registration of shares sold by the company in enforcement of lien
even without a deed of transfer. I do not think that article 19 does provide
for registration without a deed of transfer. It only provides that upon any such
sale as aforesaid, the directors may enter the purchaser's name in the register
as the holder of these shares. It does not follow that the article enables
registration without a deed of transfer. To hold that it does makes it
inconsistent with the provisions of section 34 of the Act. The articles of the
company should be so construed as to harmonise and be consistent with the
provisions of the Indian Companies Act. THat is the proper rule of
construction. To construe otherwise, article 19 would run counter to section 34
of the Companies Act and would be ultra vires to that extent.
It is next
argued that on a true construction, the sale of shares by the company in
enforcement of lien is excluded from the operation of section 34 of the Act.
The section does not apply to cases of sale when the company itself is selling
the shares. THe company being itself the seller is bound to register the shares
and if the company does not, the purchaser can compel the company to register
the shares. I agree that the section does not contemplate cases of transfer by
the company of its own shares. Just as allotment by the company of its own
share cannot be characterised as a transfer within the meaning of the section,
similarly the sale of its own share by the company after forfeiture also cannot
be characterised as a "transfer", within the meaning of section 34 of
the Indian Companies Act. But shares belonging to other people which the
company is selling in enforcement of lien or equitable charge cannot be treated
on the same footing. They are not shares in which the company has
"property" and the sale does not result in transfer of property from
the company to the purchaser. The sale in enforcement of lien results in the
transfer of property from one registered owner to the purchaser and is not
different from ordinary transfer from one shareholder to another. The fact that
the company acts as the seller being authorised by the articles to sell, does
not alter the character of the transaction. It is a case of transfer just like
any other transfer and is covered by section 34 of the Act. I do not think that
sale of shares by the company in enforcement of lien is excluded from the
operation of section 34 of the Act.
Two
authorities have been cited in support of the contention that even without the
transfer deed, registration may be effected by the directors, which may now be
considered. The first case is the case of Mohideen Pichai v. Tinnevelly Mills
Co. {A.I.R. 1928 Mad. 571}, decided by a very strong Division Bench of the Madras
High Court. The case before the Madras High Court was argued by the most
eminent counsel Mr. Varadachariar and Sir Alladi Krishnaswami Ayyar. THe point
considered was whether a purchaser of share in a court sale is entitled to
succeed in a suit for rectification of the share register by recording his name
on the strength of his purchase in a court sale. It was held that such a suit
is maintainable and must succeed. In his judgment SRINIVASA AYYANGER J. made
the following observation at page 574:
"To begin
with, it must be pointed out that the expression `transfer' by itself is not
altogether appropriate to indicate a sale in invitum by the court. No doubt the
expression `transfer' has been used in such collocations as `transfer by
operation of law', but at the same time the expression `transfer' is
undoubtedly more appropriate to indicate what is effected or brought about by
the will of the person in whom the property is vested, as in the Transfer of
Property Act".
It is argued
from the above observation that the "transfer" in section 34 is to be
construed in the sense of voluntary transfer and not transfer under compulsion.
In the instant case, the transfer has not been effected voluntarily by the
plaintiff, the registered holder, but by the directors against the wishes of
the registered holder. Hence it is argued by the learned Additional
Solicitor-General that the observation set out above will apply not only to
cases of court sale but also to involuntary sale effected by the directors to
enforce lien.
The second
case relied on is the case of Mahadeolal v. New Darjeeling Union Tea Co. {55
C.W.N. 408}, decided by a Division Bench of this court. In this case also the
same question arose, namely, whether a purchaser in a court sale is entitled to
have his name registered on the basis of being the auction purchaser in a court
sale. The Division Bench cited with approval the above observation in the
Madras case, and agreed with the view taken by the Madras Division Bench on the
point. It should be noted that the Madras case was decided prior to the
amendment of section 34 of the Companies Act, while the Calcutta case had been
decided after the amendment when section 34 is the same as it is now. It is
clear that none of the cases is a direct authority on the point. Both are cases
of court sale. Further, the Madras decision was prior to the amendment of the
companies Act and was decided on a construction of the articles of the company
and not upon a construction of section 34 of the Companies Act. Observations made
by the Madras High Court and approved by this court must be read in the
background of the facts of that case - and the fact considered in that case was
the acquisition of the shares in a court sale. Nevertheless it is perfectly
legitimate for the defendants to use the reasoning in the Madras case, as being
applicable not merely to a court sale but to all kinds of involuntary transfer.
This reasoning, therefore, implies that section 34 is restricted to a voluntary
transfer effected by a shareholder to a purchaser. It may include transfer
effected by an agent of the shareholder with the approval of the shareholder at
the time of transfer. But it cannot cover a case of sale of shares by a pledgee
when sale is effected in enforcement of the pledge by the pledgee, unless the
pledgor expressly consents to the sale. It is on the same reasoning that the
sale of shares by a director in enforcement of the pledge can be said to be
"transfer" within the meaning of section 34 on the ground that the
sale is involuntary. It has not been held in any case that in the case of sale
of shares by a pledgee to enforce the pledge - transfer deed is unnecessary. If
not, how can it be urged that it is unnecessary in the case of sale in
enforcement of a lien on the ground that the sale is involuntary. In either
case the authority to sell is derived from the owner of the shares, in the case
of pledge when the pledge was given and in the case of lien when the shares
were purchased. In both cases the sale is effected with the implied consent of
the owner - consent having been given before, though at the time of sale the
owner of the share has not only given no consent but positively objected to the
sale. Indeed unless there is consent though presumed in law on the part of the
shareholder, there cannot be any transfer to the property to the purchaser.
Such a sale, therefore, cannot be an involuntary sale in the same sense as a
court sale. A court sale is entirely different from such a sale. There is an
express provision in the Code of Civil Procedure, Order XXI, rule 80, to the
effect that where execution of a document is required to transfer shares then
the execution of that document by the court would be sufficient. In other
words, such document will effect the transfer.
There being
this specific provision in the statute with respect to shares transferred or
sold in execution of a decree, the general provisions in section 34 of the
Companies Act as to transfer of shares is held not be applicable in the case of
shares sold in execution. The reason of non- applicability of section 34 of the
Companies Act in the case of court sale is not the involuntary nature of the
transaction but the express provision in the Code which provides for another
mode of transfer of share in the case of share in the case of court sale.
For the
reasons stated, it was not lawful for the defendant company to register the
transfer of shares in the name of Ramapada Gupta in the absence of a proper
instrument of transfer having been deposited with the company.
This disposes
of all the points argued before me. I should record that no serious attempt was
made to prove the case made by the plaintiff in paragraph 14 of the plaint to
the effect that a new board of directors consisting of Dr. S.P. Bhattacharji,
Gunabantrai Ojha, D.N. Bhattacharji and the plaintiff was elected in a meeting
convened by five members under articles 64 and 65 of the articles and duly
held. Similarly, no serious argument was advanced that the suit was bad for
non-joinder of Dr. Mukherjee and Dr. Neogy as parties.
For reasons
given above the plaintiff succeeds and I pass a decree in terms of prayers (a),
(b), (c), (d), (e), (f), (g) and costs. Certified for three counsel.
I would be
failing in my duty if I do not record the great assistance rendered to the
court by all the learned counsel - seniors and juniors alike. The case is very
heavy and the learned cousel did not spare themselves. No judge got the
assistance that I received from the Bar in this case and I wish to record my
gratitude to each one of them.
[1953]
23 Comp Cas 399 (
v.
Pandit Shirali &
Co.
Sarkar,
J.
Civil
Suit No. 2834 of 1949
February 29, 1952
D.C. Sethia, for the plaintiff.
G. Mitter, for the company.
Sarkar J.—In this suit there are three defendants but only one of them, namely, defendant 3, appeared to contest the claim. The other two defendants filed their written statements but did not appear at the hearing. The substantial contest is whether the plaintiff or defendant 3 is entitled to a prior charge over certain shares belonging to defendant 2.
The plaintiff alleges that on 1st August, 1946, defendant 1, Pandit Shirali & Co., executed a promissory note for Rs. 37,500 payable to him on demand and defendant 2, Hemmad, guaranteed the due payment of the promissory note and as security for the guarantee, in or about November 1947, pledged to the plaintiff certain shares held by him in the Orient Movietone Corporation Ltd., which is defendant 3 in this suit. The plaintiff claims the amount of the promissory note against the debtor and the guarantor and also the enforcement of the pledge by the guarantor. He has proved the promissory note and the guarantee and is, therefore, entitled to the money decree claimed against Pandit Shirali & Co. and Hemmad.
The difficulty arises with regard to the other part of the plaintiff's claim, namely, his enforcement of the pledge. This claim is opposed by defendant 3, the Orient Movietone Corporation Ltd. I will call this defendant, the defendant company. It says that it has a prior charge over the shares. This question of priority was the principal point argued in this case.
The defendant company also denied that the plaintiff had any pledge. As I have said, the plaintiff proved the pledge and produced the share scrips and transfers. These transfers are, however, completely blank except for the signatures of Hemmad and of a witness who attested Hemmad's signatures thereon. It does not seem to me that this condition of the transfers makes the pledge invalid and I did not understand learned counsel for the defendant company to contend seriously that it was so. It is well settled that the person, to whom share scrips and transfers in blank as to the name of the transferee and the date of the transfer are given, has the authority of the transferor to fill up these blanks. See In the matter of Benegal Silk Mills Co. Ltd.
This authority is presumed from the fact that the transferor did intend, by what he had done, to transfer the shares to the transferee or to such person as the transferee wanted, and as the transfer would not be complete in law unless these blanks were filled up, the transferee must be deemed to have been authorised by the transferor to fill up the blanks. If such is the principle, then the transferee must be deemed to have been authorised to fill up all blanks necessary to make the transfer effective in law. Further, to my mind, even if the transfers were held invalid that would not affect the question. The deposits of the share scrips themselves would be sufficient to create a pledge thereon. The transfers, if in order, would have transferred the title in the shares to the plaintiff, but a transfer of title is not necessary to create a pledge, simple delivery of possession being enough. It must, therefore, be held that the plaintiff became a pledgee of the shares in or about November 1947.
The defendant company then says that, even if the shares had been pledged to the plaintiff in November 1947, it held a prior charge thereon. Its case is that, under an agreement between it and Pandit Shirali & Co., it had advanced large sums of moneys to the latter in connection with the exploitation of certain cinematographic films. It is stated that in February 1949 a sum of Rs. 61,095-13-9 was due to the defendant company from Pandit Shirali & Co. under this agreement. It is further stated that, upon the defendant company pressing for payment of this sum, Hemmad interceded and guaranteed repayment of the moneys.
According to the defendant company, upon such guarantee and upon Hemmad pledging with the defendant company the shares mentioned above, it gave Pandit Shirali & Co. a year's time to pay. These facts, excepting the actual pledge, were established in evidence. It will be remembered that the share scrips were lying with the plaintiff and had not admittedly been delivered to the defendant company. The verbal evidence and the minutes of the directors' meeting of the defendant company show that there was only an agreement by Hemmad to pledge the shares but no actual pledge. Such agreement to pay, to my mind, is of no avail. It does not result in an actual pledge as the scrips were not delivered in terms of the agreement. There is no evidence of any agreement creating a charge on the shares without a pledge. The result is that the defendant company cannot establish that in February, 1949, it acquired any right to the shares which would have been binding on the plaintiff. It is also clear that, even if it had acquired any rights then, such rights must, on the facts proved, have been of a kind which would have ranked in priority after the pledge in the plaintiff's favour because the plaintiff's rights accrued earlier and no equity has been established entitling the defendant company to supersede the plaintiff.
The defendant company then contends that it has, in any event, a lien on the shares under Article 39 of its articles of association. That article is in these terms:
"The company shall have a first and paramount lien upon all the shares registered in the name of each member (whether solely or jointly with others) and upon the proceeds of sale thereof for his debts, liabilities, and engagements, solely or jointly with any other person to or with the company, whether the period for the payment, fulfilment, or discharge thereof shall have actually arrived or not and no equitable interest in any share shall be created except upon the footing and condition that clause 16 hereof is to have full effect. And such lien shall extend to all dividends from time to time declared in respect of such shares. Unless otherwise agreed the registration of a transfer of shares shall operate as a waiver of the company's lien, if any, on such shares."
On behalf of the plaintiff it is said that, the debts, engagements and liabilities mentioned in Article 39 were those arising out of the company relationship and did not include those arising out of an independent transaction, e.g., the guarantee in the present case. The binding force of an article arises from Section 21(1) of the Companies Act. That section states:
"The memorandum and articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed by each member and contained a covenant on the part of each member, his heirs and legal representatives, to observe all the provisions of the memorandum and of the articles, subject to the provisions of this Act."
In Hanutmal Boid v. Khusiram Benarsilal, Das J. had to consider how far an article of a company, providing in very wide terms for reference to arbitration of disputes between the members inter se, constituted an arbitration agreement between them on which an application for stay under the Arbitration Act could be based. He there held:
"The
contractual force given to the articles by Section 21(1) is, by judicial
decisions, limited to matters arising out of the company relationship of the
members as members. The statutory result does not extend beyond that and does
not convert the articles into a contract or covenant in reference to rights
entirely outside the company relationship and does not affect or regulate the
rights arising out of a commercial contract with which other members have no
cencern."
I am asked to apply this decision and hold that the statute does not give a contractual force to Article 39 so as to include within it the debt due to the defendant company from Hemmad on the guarantee, on the ground that that is a commercial transaction outside the company relationship.
The judicial decisions on which Das J. based his view are decisions of English Courts on the corresponding section of the English Companies Act which is in the same terms as the section in the Indian statute. The extent of the contractual force given to the articles by the statute has always been and still is a question which cannot be regarded as fully settled. This is recognised in those judicial decisions themselves. One of the authorities, which Das J. called to his aid, is a passage in Halsbury's Laws of England (1932 Edition), Vol. V, Article 256, at p. 142. That passage, as in the case before Das J., is concerned with the binding force of the articles as a contract between the members inter se. I am concerned with the binding force of the articles as between a member and the company. This position is considered in Article 255 at p. 140 of the volume in Halsbury's Laws of England already referred. It is there stated:
"The articles constitute a contract between the company and a member in respect of his rights and liabilities as a shareholder, and the company may sue a member and a member may sue a company to enforce and restrain breaches of the regulations contained in the articles dealing with such matters."
It would not be wrong to presume from the reasoning employed by Das J. that he would have expressed his agreement with this statement of the law, if he had to consider a case between the company and a member. The question is, what are "rights and liabilities as a shareholder?" Can it be said that the debt of Hemmad on the guarantee is as a shareholder? I think, it can. In Bradford Banking Co. Ltd. v. Briggs Son & Co. Ltd., a similar decision was arrived at. That is one of the cases on which the statement of law read from Halsbury is based. One Easby held some shares in Briggs Son & Co. Ltd. The articles of Briggs Son & Co. Ltd., contained a provision, being Article 103, similar to Article 39 in the defendant company's articles before me. Briggs Son & Co. Ltd., carried on business as coal proprietor while Easby was a coal merchant. Easby purchased coal from Biggs Son & Co. Ltd., and became indebted to it for the price of coal purchased. It was held by the House of Lords that Briggs Son & Co. Ltd., had a lien on Easby's shares of the amount due to it from Easby Lord Blackburn in his speech put the position in these words at pages 33-34:
"John Faint Easby, a coal merchant, became a proprietor of a number of shares in the respondent company, and obtained certificates for them. This property in the shares was, by virtue of the 16th section of the Act already quoted, I think, bound to the company as much as if he had (at the time he became holder of these shares) executed a covenant to the company in the same terms as Article 103, but I do not think it was bound any further.
John Faint Easby filed a petition for liquidation on the 31st on December, 1883, being then indebted to the company. He had been a customer of the respondent company, and owed them a considerable sum at that date. He still continued the registed holder of the shares, and, if there had been no more in the case, it is not now at least disputed that the respondent company would have had a first lien on the shares."
It is impossible to find any distinction between the debt that Easby owed to Briggs Son & Co. Ltd., and the debt that, in the case before me, Hemmad owes to the defendant company. I, therefore, come to the conclusion that the defendant company has, by virtue of Article 39, a lien on Hemmad's shares for the debt due to it from him on the guarantee.
I have already said that the shares were pledged to the plaintiff in or about November 1947 and Hemmad's guarantee to the defendant company was in February 1949. The question then arises, who has the priority, the defendant company under its lien or the plaintiff under its pledge? On this point Bradford Banking Co. Ltd. v. Briggs Son & Co. Ltd., is again an authority. There Easby had pledged the shares with the Bradford Banking Co. Ltd. as security for the balance due and to become due on his current account with the banking company. The banking company had given notice of the pledge to Briggs Son and Co. Ltd., who replied that Easby was indebted to them and, under their articles, they had a first and paramount lien on the shares. A question arose as to who had the priority and it was held that Briggs Son & Co. Ltd. had priority in respect of the money that had become due to it before the Bradford Banking Co. Ltd. had given notice of the pledge but not in respect of the moneys that became due to it subsequent to the notice. It was held that the service of the notice decided the question of priority. Lord Blackburn put the matter thus at page 36:
"The first mortgagee is entitled to act on the supposition that the pledgor who was the owner of the whole property when he executed the first mortgage continued so, and that there has been no such second mortgage or pledge until he has notice of something to shew him that there has been such a second mortgage, but as soon as he is aware that the property on which he is entitled to rely has ceased so far to belong to the debtor, he cannot make a new advance in priority to that of which he has notice. As Lord Campbell says, 'the hardship upon the bankers from this view of the subject at once vanishes, when we consider that the security of the first mortgage is not impaired without notice of a second.' "
The position then, applying the same principle here, is that, the security created by the lien in favour of the defendant company is not impaired till it had notice of another security created on the same shares. Now, the security created by the lien, it has to be remembered, is in respect of moneys due in present or to become due in future. This is what Article 39 provides. In the present case it does not appear that any notice was given by the plaintiff to the defendant company of the pledge in his favour. It follows that the lien in favour of the defendant company was never impaired and covered all moneys due by Hemmad under the guarantee whether they became so due before or after the pledge to the plaintiff.
It was then said that notice of the pledge had been given to one of the directors of the defendant company. No such notice was, however, pleaded and no issue was raised as to whether any such notice had been given. And naturally, no evidence was led on the question. It is, therefore, not open to the plaintiff to rely on any notice. Further more, I do not think that the defendant company had in fact any notice of the pledge to the plaintiff. It is said that Hemmad himself, was a director of the defendant company and as he knew of the pledge, having himself made it, the defendant company must also be deemed to have known of it, for a director is an agent of the company and notice to an agent is notice to the principal. It is said that it was so held in In the matter of Union Indian Sugar Mills Co. Ltd.
In that case it appeared that one Debi Dutt was a director of the company and held under its articles "all powers exercisable by the directors" in the management of the company's affairs. The company had under its articles a lien on the shares held by Debi Dutt. But Debi Dutt pledged the shares with another person to secure advances received by him from that person. The question arose, whether the lien or the pledge had the priority. It was held, following Rainford v. James Keith & Blackwan & Co. Ltd., that notice to the directors even in their personal capacity was notice to the company. It was also held that as the director was the agent of the company notice to him was notice to the company and the only exception was where the agent was acting in fraud of the principal. With regard to the last proposition, I think, it states the law too broadly.
The correct proposition may be gathered from Bowstead on Agency (10th Edn.) Article 110, page 222, and it is that knowledge acquired by an agent otherwise than in the course of his employment on the principal's behalf is not imputed to the principal. In pledging the shares to the plaintiff, Hemmad was not obviously acting as the director of the defendant company and his knowledge of the pledge was, therefore, not the knowledge of the defendant company. Now, coming to Rainford v. James etc., Co. Ltd., on which also the Allahabad case is based, it appears that the rules of a company provided that no transfer of shares would be effected without the production of the scrips. Notwithstanding this, however, the directors allowed a transfer of certain shares to be registered without the scrips being produced, relying on a statement of the transferor that the shares were lying with a friend but not as security. Under the terms of the arrangement relating to the registration of the transfer, the price of the shares was paid by the transferee, not to the transferor but to the company in reduction of the transferor's liability to it. The arrangement had in reality been made for the benefit of the company. The shares had, however, been actually pledged by the transferor to another person, who thereafter produced the scrips and the transfer deed signed by the pledgor and asked the company to register a transfer in his favour. The company refused. The pledgee then brought an action claiming relief for the wrongful registration of the transfer by the company and was held entitled to recover the price of the shares from the company. It was said that the transferor's statement that the shares were lying with another person put the company on enquiry about the right of that person in the shares and the company was affected with notice that that person might have a charge on the shares. Furthermore, it appeared that the directors of the company, who were in charge of making the arrangement allowing the registration for the transfer in favour of the first transferee and the appropriation of the price paid by him towards the company's dues from the transferor, had in fact notice of the pledge. As the notice was received by the directors while acting as directors, that is to say, in the course of their employment under the company, the company, it was held, must be deemed to have notice of the pledge. The matter was put in this way by Stirling L.J. at page 161:
"Where the company in which the shares are held sees fit to deal with the shares for its own benefit, then that company is liable to be affected with notice of the interest of a third party, and is affected with such notice if it is brought home to the agents who managed the transaction on its behalf."
On these grounds the company was made to refund the price of the shares appropriated by it, to the pledgee. This case, therefore, turned on the fact that those who made the bargain on behalf of the company, had notice of the plaintiff's rights. When, in making the bargain, they acted as agents of the company and had notice of the plaintiff's rights, the notice must, of course, be imputed to the company.
The facts in the present case are different. The agreement of guarantee by Hemmad was made on behalf of the company by its directors other than Hemmad. Such directors had no knowledge of the pledge by Hemmad and Hemmad's knowledge of the pledge cannot be imputed to the defendant company, for such knowledge was not received by Hemmad as agent of the company. In making the pledge he was in fact acting for himself and not the company. The Allahabad case may be justified by reason of the special provision in the articles of the company there concerned, making Debi Dutt, in substance, the sole director of the company. In the case before me there is no such provision. I am unable, therefore, to agree that In re Union Indian Sugar Mills Co. Ltd., covers the present case.
It was then said that the defendant company had waived its lien because it entered into the agreement for pledge with Hemmad in February, 1949. Rajib Nath v. Chota Nagpur Banking Association Ltd. was cited as an authority for this contention. There, the defendant bank had an article substantially the same as Article 39 before me. The bank brought a suit against one of its shareholders for a debt due to it and obtained a money decree and in execution thereof the shares of the debtor were put to sale expressly stating that they would be sold free of incumbrance and itself purchased the same. The bank then realised that such a purchase would be bad, as it would result in reduction of its share capital without an order in that behalf from the court under Section 55(1), Companies Act. It thereupon allowed the shares to stand in the debtor's name and subsequently purported to sell them in the exercise of its lien under the articles, to some of its directors. The debtor's heirs having sued to set aside the sale, the suit was allowed. One of the grounds of the decision was that the bank's conduct in the previous suit, amounted to a waiver of the lien upon which it could not afterwards rely. The learned Judges based their decision on a passage in Halsbury's Laws of England (Hailsham Edition) Article 738 page 584 and two cases cited in support of that passage. The passage states that a lien is waived or destroyed where a party claims to retain goods on grounds different from those on which he rests his claim for lien and makes no mention of the lien. This statement of the law is clearly meant to apply to possessory liens and not to a non-possessory lien created by contract giving rise to an equitable charge, as was the case before the learned Judges of the Patna High Court and as is the case before me. I am unable, therefore, to hold that that case decides the question in the case in hand.
There is no doubt, however, that a contractual lien may also be waived. The question is, was there such a waiver in the present case. The law as to waiver of a contractual right may now be set out from Halsbury's Laws of England (Hailsham Edn.) Vol. VII, Article 285 page 204.
"A contract may be discharged either wholly or in part, before there has been any breach of it, by a waiver of the right to insist upon its performance. Waiver is based on fresh contract or estoppel. Where, for instance, one party consents at the request of the other to extend the time for performance or to accept performance in a different mode from that contracted for………if the new arrangement is in fact carried out, the obligation of the other party under the contract is discharged to the extent to which the promisee has waived his rights."
It is true that if a person having a contractual lien creating an equitable charge in his favour accepts a pledge of the goods over which he has the lien, the lien disappears by waiver, for the pledge is a higher security than the equitable charge and the acceptance of it implies an intention to give up the lower security. As is stated in the passage just read from Halsbury, in order to have this effect the pledge must have been created, or to put it in the language of that passage, "the new arrangement must in fact be carried out." Now, in the present case there was only an agreement to pledge which had never been carried out. The pledge had never in fact been made in terms of the agreement to make it. It cannot be said that a mere agreement to take a pledge amounts to a waiver of the existing lien. There is in such a case no executed contract giving up the lien nor any conduct creating an estoppel against the exercise of the rights under the lien. In the Patna case there may have been waiver because an order for sale had actually been made expressly providing that the sale would be without any incumbrance. I am, therefore, unable to hold that, in the case in hand, the defendant company had waived its lien.
There will, in the result, be a decree for Rs. 43,000 with interest on judgment and costs against defendants 1 and 2. Such costs are certified for two counsel.
There will be a declaration that the plaintiff is a pledgee of the shares mentioned in the plaint but such pledge will rank in priority after the lien thereon in favour of defendant 3. The plaintiff will pay the costs of this suit of defendant 3.
There will be an order that the shares may be sold by the Official Receiver of this court and out of the sale proceeds defendant 3 will be paid the sum of Rs. 42,435-0-11. After payment of this sum to defendant 3 if there is any balance left that will be paid to the plaintiff in pro tanto satisfaction of the decree made in his favour against defendants 1 and 2.
[1979] 49 COMP. CAS. 112 (BOM.)
HIGH COURT OF
v.
Juliet M. Fateh
KANTAWALA, C.J.
AND TULZAPURKAR, J.
ITR No. 17 of 1968
AUGUST 11, 1977
R.J.
Joshi and V.J. Pandit for the Applicant.
D.H. Dwarkadas for the Respondent.
Tulzapurkar,
J.—The question that
has been referred to this court for determination in this reference made by the
Appellate Tribunal under s. 256(1) of the I.T. Act, 1961, runs thus :
"Whether,
on the facts and in the circumstances of the case, the assessee was entitled to
the credit of the tax of Rs. 1,350 deducted at source from the gross dividend
of Rs. 4,500 ?"
The
assessee is an individual and the assessment year is 1962-63, the corresponding
previous year being the financial year which ended on March 31, 1962. The
assessee's husband owned a number of shares in Oxy-chloride Flooring Products
Ltd. and out of his said shareholding he had got 1,000 shares converted into
share warrants as permitted by the relevant articles of association of the
company. The assessee inherited the said share warrants. In the previous year
relevant to assessment year 1962-63, the assessee received a net dividend of
Rs. 3,150 after deduction of tax of Rs. 1,350 from the company in respect of
the said share warrants. In making the assessment on the assessee, the ITO
refused to give any credit for the tax deducted at source and he straightaway
taxed the net dividend of Rs. 3,150. According to him, the assessee was not entitled to the credit for the tax deducted at source
because she was not registered in the books of the company as the owner of
those shares and hence she could not be treated as the shareholder for the
purpose of getting credit for the tax deducted at source under s. 199 of the
Act. He relied upon the decision of the Supreme Court in Howrah Trading Co.
Ltd. v. CIT [1959] 36 ITR 215. The assessee preferred an appeal to the AAC, who
did not accept the view of the ITO. The AAC took the view that the ratio of the
Supreme Court decision in Howrah Trading Co.'s case [1959] 36 ITR 215 was not
applicable, inasmuch as, in the instant case before him, there was no question
of any dual ownership of shares in question, there was no conflict between the
legal ownership and the equitable ownership of the shares and in fact it was
the assessee who was both legal as well as beneficial owner of the shares
specified in the share warrants. After referring to ss. 114 and 115 of
Companies Act and after considering the relevant articles of association of the
company, namely, arts. 52 to 55, he took the view that the assessee owned the
shares specified in the share warrants and the company paid her dividends on
those shares as the only owner thereof known to it, and since as such, while
making the payment of dividend, the company had made a deduction of tax at
source, the assessee was entitled to get credit for the tax so deducted at
source under s. 199 of the I.T. Act. Accordingly, the AAC allowed the appeal.
Aggrieved by the order passed by the AAC the department carried the matter in
further appeal to the Tribuna. Several contentions were raised on behalf of the
department before the Tribunal. In the first place, it was contended that the
tax deduction certificate given by the company did not comply with the form
prescribed under r. 31(4) of the I.T. Rules, 1962. It was next contended that
the assessee who held merely the share warrants should not be considered as a
shareholder within the meaning of ss. 194 and 199 of the I.T. Act and in
support of this latter contention strong reliance was placed upon the decision
of the Supreme Court in Howrah Trading Co. Ltd.'s case [1959] 36 ITR 215 and a
couple of other decisions. In reply, it was urged on behalf of the assessee
that as regards tax deduction certificate, if there was any mistake therein it
was the mistake of the company which had issued the certificate for which the
assessee could not be held responsible and on that account she could not be
denied the credit for the tax deducted at source. It was further contended that
the bearer of share warrant was as much a shareholder within the scope of ss.
194 and 199 as one whose name was entered in the shareholders' register and as
such the assessee was entitled to the credit for the tax deducted at source. In
any case, it was urged that since the asssesee would be entitled to get credit
by virtue of s. 237 of the Act, she could not be denied relief in that respect.
The Tribunal after considering the relevant provisions of the Companies Act,
viz., ss. 114 and 115, as well as the provisions of the articles of
association, viz., arts. 52 to 55 of the company, came to the conclusion that
the holder of the share warrants could be regarded as a shareholder for the
purposes of ss. 194 and 199 of the Act. In this behalf, the Tribunal pointed
out that under the relevant provisions of the Companies Act as well as the
articles of association of the company the bearer or holder of a share warrant
was entitled to receive the dividend and was entitled to all the privileges and
advantages which the shareholder has except those specifically mentioned in the
articles and such holder of share warrant will have to be treated as if he was
a shareholder of the company and as such the assessee would be entitled to the
credit for the tax deducted at source. Alternatively, the Tribunal considered
the question as to whether she could be eligible for the credit under the
provisions of s. 237 of the Act even if it were assumed for the purpose of
argument that as a holder of share warrants she could not be regarded as a
shareholder and the Tribunal took the view that in the instant case the
identity of the holder of the share warrants as being the person to whom the
dividend was payable had been established without which the company would not
have paid the dividend to her and since the company had made payment of
dividend after deducting tax in respect of the income of the assessee, the
assessee would be entitled to get credit even under the provisions of s. 237 of
the Act, since what was deducted by the company could be regarded as tax
payment made by the assessee herself or on her behalf. As regards the tax
deduction certificates which had been issued, the Tribunal gave an opportunity
to the assessee to approach the company and obtain from it and produce a proper
tax deduction certificate in the prescribed form under the relevant rules. In
this view of the matter, the Tribunal upheld the AAC's order and dismissed the
appeal. At the instance of the revenue, the question set out at the
commencement of the judgment has been referred to us for our opinion.
Mr. Joshi appearing for the
revenue has invited our attention to the aspect that if regard be had to the
definition of the expression "member" given in s. 2(27) of the
Companies Act it would be clear that a bearer or holder of a share warrant is
excluded from the definition of the expression "member". He further
pointed out that the Supreme Court in Howrah Trading Co. Ltd.'s case [1959] 36
ITR 215 has taken the view that the words "member",
"shareholder" and "holder of a share" have been used
interchangeably in the Companies Act and, therefore, if the bearer of a share
warrant is not a member of the company he would automatically not be either a
shareholder of the company or holder of a share in the company. He also pointed
out that under ss. 114 and 115 of the Companies Act it has been provided that a
public company limited by shares, if so authorised by its articles, may, with
the previous approval of the Central Government, with respect to any fully paid
up shares, issue under its common seal a warrant (share warrant) stating that
the bearer of the warrant is entitled to the shares therein specified, and may
provide, by coupons or otherwise, for the payment of the future dividends on
the shares specified in the warrant, that such share warrant entitled the
bearer thereof to the shares therein specified and the shares therein specified
may be transferred by delivery of the warrant and that on the issue of a share
warrant, the company is under an obligation to strike out of its register of
members the name of the member then entered therein as holding the shares
specified in the warrant as if he had ceased to be a member. He, therefore,
urged that since the assessee in the instant case was merely a holder of share
warrants in question, she could not be regarded as either a member or a
shareholder of the company. According to Mr. Joshi, the expression
"shareholder" occurring in s. 18(5) read with s. 16(2) of the 1922
Act (equivalent to s. 199 of 1961 Act) has been interpreted, and construed by
the Supreme Court as being referable to a registered shareholder whose name has
been entered or appears in the register of members maintained by the company.
S. 194 of the Act speaks of deduction of tax being made at source by the
company or the principal officer before making distribution or payment of
dividend to a shareholder and s. 199 of the Act speaks of credit being given to
the shareholder in respect of such deduction of tax at source made by the
company or its principal officer and, according to Mr. Joshi, the Supreme Court
in Howrah Trading Co.'s case [1959] 36 ITR 215 has (with reference to
corresponding provisions of the 1922 Act being ss. 18(5) and 16(2)) taken the
view that the provisions of those sections are applicable (meaning thereby the
process of grossing up indicated in those provisions) only in the case of a
shareholder whose name has been registered in the company's register of
members. Reliance was also placed by Mr. Joshi upon a decision of this court in
Shri Sakthi Mills Ltd. v. CIT [1948] 16 ITR 187 (Bom), where this
court has also taken the view that the "shareholder" mentioned in s.
18(5) of the 1922 Act is the person who owns certain shares and who is shown as
a shareholder in the register of the company and that it is only the
shareholder of a company to whom dividends are paid who is entitled to the
procedure of processing permissible under ss. 16(2) and 18(5). He also relied
upon the decision of the Supreme Court in the case of ITO v. Arvind N. Mafatlal
[1962] 45 ITR 271, where the same view has been reiterated by the Supreme
Court, namely, that it is only the registered shareholder who is entitled to
the benefit of the credit for tax paid, by the company under s. 18(5) as well
as the corresponding grossing up under s. 16(2). He pointed out that all these three
decisions were under the 1922 Act. But he also relied upon a decision of the
Andhra Pradesh High Court in the case of CIT v. Smt. Batool Begum [1976] 104
ITR 642, a decision under s. 199 of the 1961 Act, where also a similar view has
been taken by the High Court. Relying on these decisions and the position
arising under the relevant sections of the Companies Act, Mr. Joshi contended
that since in the instant case the assessee was merely a bearer or holder of
share warrants, her husband's name as a shareholder having been struck off from
the register of members long prior to the previous year in question, the
assessee could not be regarded as a registered shareholder in respect of shares
specified in the share warrants and as such she was not entitled to the credit
for the tax deducted at source under s. 199 of the I.T. Act, 1961. Mr. Joshi
also relied upon the fact that though under cl. (ii) of the prov. to s. 199
certain exemptions have been carved out in cases where the dividend on any
share is assessable as the income of a person other than the shareholder, and
the credit for the tax deducted at source has been made permissible, such
excepted cases would be only those cases which had been prescribed by rules,
and he pointed out that r. 30A, which has been framed in that behalf,
enumerates several types of cases which would fall under cl. (ii) of the prov.
to s. 199, but the case of a holder of share warrant is not one of the cases
specified in r. 30A. He urged that the absence of a case of holder of share
warrant in r. 30A should be taken to be the evidence of legislative intent on
the part of Parliament that in the case of holder of a share warrant the
benefit under s. 199 should not be available.
On the other hand, Mr.
Dwarkadas appearing for the assessee contended that if the provisions of ss.
114 and 115 of the Companies Act, particularly sub-s. (5) of s. 115, along with
the relevant articles of association of the company, particularly art. 55, were
carefully scrutinised, it will appear clear that for all purposes, except
certain matters which have been specifically mentioned in art. 55, the holder
or bearer of a share warrant has been regarded by the company as if he is a
member of the company and, therefore, there was no reason why the holder of a share
warrant should not be entitled to get credit for the tax deducted at source
under the provisions of s. 199 of the I.T. Act. He urged that having regard to
the aforesaid provisions the assessee will have to be regarded as a shareholder
for the purpose of s. 199 of the Act and as such would be entitled to the
credit for the tax deducted at source in respect of dividend income received by
the assessee for the shares specified in the share warrants. He contended that
the two decisions on which reliance has been placed by Mr. Joshi were clearly
distinguishable, inasmuch as in each one of those cases the conflict was
between the legal ownership of shares and equitable ownership of shares and it
was in the context of such a conflict that the court had taken the view that it
was only the registered shareholder whose name is registered in the books or
register of members maintained by the company who was entitled to the benefit of the provisions
of s. 18(5) read with s. 16(2) of the old Act and ss. 194 and 199 of the 1961
Act. According to him, in the instant case, there was no conflict at all
between the legal ownership of shares in question or the equitable ownership of
shares in question and indisputably it was the assessee who was both the legal
owner as well as the equitable owner or beneficial owner of shares which were
specified in the share warrants of which the assessee was the holder and,
therefore, the question which this court is called upon to decide is whether
the holder of the share warrants, who has deposited the share warrants with the
company after the annual general body meeting of the company was held and who
has received the dividend after her identity had been established before the
principal officer of the company, would be entitled to the credit for the tax
deducted at source by the principal officer of the company and such a case has
not been dealt with by any of the decisions on which reliance has been placed
by Mr. Joshi. According to Mr. Dwarkadas, reference to cl. (ii) of the prov. to
s. 199 and the question whether the assessee's case falls under the said prov.
read with r. 30A is really irrelevant, for, according to him, the assessee is
entitled to credit for the tax deducted at source by reason of the main
provision contained in s. 199 itself, inasmuch as, according to him, having
regard to the provisions of ss. 114 and 115 of the Companies Act read with the
relevant articles of the articles of association the assessee will have to be
regarded as a shareholder within the meaning of s. 199 of the Act and as such
should be entitled to get credit for the tax deducted at source. Alternatively,
he submitted that even if the assessee could not be regarded as a shareholder
within the meaning of s. 199 of the Act, she should be entitled to get similar
credit under the provisions of s. 237 of the Act.
In
order to decide the principal question that arises for our consideration as to
whether the assessee could be regarded as a shareholder for the purpose of s.
199 of the Act or not, it will be necessary to refer to the relevant provisions
of the Companies Act as well as the articles of association of the company. At
the outset it may be stated that the expression "shareholder" has not
been defined under the Companies Act though the expression "share" has
been defined and the expression "member" has also been defined. S.
2(27) defines the expression "member" thus :
"
'member ', in relation to a company, does not include a bearer of a share
warrant of the company issued in pursuance of section 114."
The
expression "share" has been defined in s. 2(46) thus :
"
'share', means share in the share capital of a company, and includes stock
except where a distinction between stock and shares is expressed or
implied."
It
is true, as was pointed out by Mr. Joshi, that in Howrah Trading Co.'s case
[1959] 36 ITR 215, the Supreme Court has observed at p. 218 as follows:
"A
glance at the scheme of the Indian Companies Act, 1913, shows that the words
'member', 'shareholder' and 'holder of a share' have been used interchangeably
in the Act. Indeed, the opinion of most of the writers on the subject is also
the same."
We
would also proceed on the basis that even the scheme of the Companies Act,
1956, also shows that the three expressions have been used interchangeably in
that Act. But it must be stated that all the expressions defined in s. 2 of the
Companies Act, 1956, are to be given the meanings assigned to them "unless
the context otherwise requires". This will be clear from the opening words
of the section. This will have significance when the provisions of s. 115(5)
are considered. The topic of share warrants is dealt with by ss. 114 and 115 of
the Companies Act. S. 114 deals with issue and effect of share warrants to
bearer and it runs thus :
"114. (1) A public
company limited by shares, if so authorised by its articles, may, with the
previous approval of the Central Government, with respect to any fully paid-up
shares, issue under its common seal a warrant stating that the bearer of the
warrant is entitled to the shares therein specified, and may provide, by
coupons or otherwise, for the payment of the future dividends on the shares
specified in the warrant.
(2) The warrant
aforesaid is in this Act referred to as a 'share warrant'.
(3) A share warrant
shall entitle the bearer thereof to the shares therein specified, and the
shares may be transferred by
delivery of the warrant."
S.
115 deals with share warrants and entries in register of members and it runs
thus:
"115. (1) On the
issue of a share warrant, the company shall strike out of its register of
members the name of the member then entered therein as holding the shares
specified in the warrant as if he had ceased to be a member, and shall enter in
that register the following particulars, namely:—
(a) the
fact of the issue of the warrant;
(b) a statement of the shares specified in the
warrant, distinguishing each share by its number ; and
(c) the
date of the issue of the warrant.
(2) The
bearer of a share warrant shall, subject to the articles of the company, be
entitled, on surrendering the warrant for cancellation and paying such fee to
the company as the board of directors may from time to time determine, to have
his name entered as a member in the register of members.
(3) The company
shall be responsible for any loss incurred by any person by reason of the
company entering in its register of members the name of a bearer of a share
warrant in respect of the shares therein specified, without the warrant being
surrendered and cancelled.
(4) Until the
warrant is surrendered, the particulars specified in sub-section (1) shall be
deemed to be the particulars requited by this Act to be entered in the register
of members; and, on the surrender, the date of the surrender shall be entered
in that register.
(5) Subject to
the provisions of this Act, the bearer of a share warrant may, if the articles
of the company so provide, be deemed to be a member of the company within the
meaning of this Act, for any purposes defined in the
articles....................."
Two
or three things abundantly become clear on a reading of the afpresaid two
sections. In the first place, under s. 114 a public company can, if so
authorised by its articles, with the previous approval of the Central
Government, issue a share warrant with respect to any fully paid-up shares,
such share warrant stating that the bearer of the warrant is entitled to the
shares therein specified and that such share warrant entitles the bearer
thereof to transfer the shares therein specified by delivery of the warrant.
Secondly, once such share warrant is issued the company is under an obligation
to strike out of its register of members the name of the member then entered,
therein as holding the shares as specified in the warrant as if he had ceased
to be a member and instead certain particulars specified in sub-s. (1) are
required to be entered in the register. Sub-s. (2) of s. 115 permits the bearer
of share warrant to surrender the share warrant for cancellation and again have
his name entered as a member in the register of members. Thirdly, sub-s. (5) is
very material under which it has been provided that subject to the provisions
of this Act the bearer of a share warrant may, if the articles of the company
so provide, be deemed to be a member of the company within the meaning of this
Act, for any purposes defined in the articles, and this sub-s. (5) if read with the relevant art. 55
that has been framed by the company will make it clear that barring certain
specified purposes for all other purposes he is the holder of the shares as if
he is a member of the company. In other words, the definition of
"member" in s. 2(27) will have to be read in the context of sub-s.
(5) of s. 115 read with 'art. 55 of the articles of association of the company.
Relevant articles dealing with the topic of share warrants are arts. 52 to to
55, Art. 52 empowers the company to issue share warrants, with respect to any
share which is fully paid-up, on application in writing signed by the person or all the persons registered as holder or
holders of the share. It is to be noted that this article provides that the
share warrant shall state that "the bearer of the warrant is entitled to
the shares therein specified" and may provide by coupons or otherwise for
payment of dividends or other moneys, on the shares included in the warrant. It
then goes on to provide for striking out the name of the member from the
register of members, etc. Art. 53 deals with transfer of share warrant and it provides
that a share warrant shall entitle the bearer to the shares included in it and
the shares shall be transferred by the delivery of the share warrant and that
the provisions of the regulations of the company with respect to transfer and
transmission of shares shall not apply thereto; in other words, under art. 53
the shares -specified in the share warrant become transferable by delivery of
the share warrant. Art. 54 deals with reconversion of share warrant into share
certificate. Then comes art. 55 which is most material and the last part of it,
whieh is relevant runs thus:
".........................but
the bearer of the share warrant shall be entitled in all other respects to the
same privileges and advantages as if he were named in the Register of Members
as the holder of the shares included in the warrant, and he shall be a member
of the Company."
This last portion of art.
55 clearly suggests that in all other respects, meaning other than those which
have been specifically mentioned in the earlier part of the article, the bearer
of the share warrant will have the same privileges and advantages as if he were
named in the register of members as the holder of the shares included in the
warrant and he shall be a member of the company. In the earlier part of the
article, it is provided that no person shall, as the bearer of a share warrant,
sign a requisition for calling a meeting of the company or attend or vote or
exercise any other privileges of a member at a meeting of the company or be
entitled to receive any notice from the company nor shall be qualified in
respect of the shares specified in the warrants for being a director of the'
company. In other words, barring these purposes, for all other purposes he is a
member of the company. We may point out that this aft. 55 has been
substantially drawn after regulations 38 and 39 of Table "A" of the
Indian Companies Act, 1913, the corresponding articles being arts. 41 and 42 of
Table "A" of the Companies Act, 1956. In view of the aforesaid
provisions, which are to be found in ss. 114 and 115, particularly s. 115(5)
and arts. 52 to .55, particularly last portion of art. 55, it will appear clear
that the bearer or holder of the share warrant for all other purposes which
would include the purpose of receiving dividend of the shares mentioned or
specified in the share warrant, will have to be regarded as the holder of
shares included in the share warrant and he shall be a member of the company.
Moreover, the share warrants, a specimen of which was produced before us,
clearly state in terms that"the bearer of the warrant was entitled to the
shares therein specified",—shares as defined in s. 2(46). Besides, it was
not disputed that in the instant case in the notice for the relevant annual
general meeting the holder of share warrants were required on or after 30th
September, 1961, the day after the annual general meeting, to apply to the
company for the dividends along with the respective share warrants and that
accordingly the share warrants were deposited with the company by the assessee
when she applied for payment of dividend on which occasion the address and
identity of the assessee as the holder of the share warrant was established to
the satisfaction of the company. There is also one more aspect which will have
a bearing on the question at issue and which has been mentioned by the Tribunal
in its order and that aspect is that the appropriate amount of tax to be
deducted varies between a resident and a non-resident and if the person holding
a share warrant is a non-resident, then the tax will have to be deducted at a
different rate ; in other words, the deduction of tax either on the basis of
residential status or non-residential status of warrant holder must be decided
by the company before the appropriate amount of tax is deducted at source and
in the instant case the assessee's residential status must have been
established before the company and after being satisfied about it the company
must have deducted the tax at source in respect of shares specified in the share
warrants which were so deposited ; in other words, the deduction of tax would
be related not only to the quantum of dividend but also to the person entitled
to it and in this sense also the payment of dividend would be made by the
company only to the person who holds the shares in the company. Having regard
to these aspects of the matter, it seems to us clear that the assessee who is
the holder of the relevant share warrants will have to be regarded holder oi
shares, the details of which were specified in the share warrants in question
and as such she would be entitled to the credit* for the tax deducted at source
by the company while making payment of dividend to her under s. 199 of the Act.
Looking at the question'
from the angle of the provisions of the I. T. Act also, the aforesaid position
becomes very clear. It is true that under s. 194 the principal officer of the
company before making any distribution or payment of dividend to a shareholder
is required to deduct the appropriate amount of tax from the amount of dividend
payable to such shareholder. Similarly, under s. 199, credit for tax so
deducted under s. 194 is required to be given to the shareholder on whose
behalf the deduction was made by the principal officer of the company. It is
true that both the sections, particularly s. 199, uses the expression
"shareholder" but the section does not refer to any registered
shareholder as such, After all, the share certificates are merely pieces of
evidence proving that the holder thereof owns shares in the company and what is
of the essence is that the assessee herself owned shares in the company in
order to become entitled to dividend as also to the credit for the deduction of
tax made at source while receiving payment of dividend. The expression "share"
has been defined in the Companies Act in s. 2(46) as meaning shares in the
share capital of a company. It cannot be disputed that the assessee in the
instant case owned shares in the share capital of the company and such share in
the share capital of the company was represented by shares, the particulars of
which were specified in the share warrant. Strictly speaking., therefore, the
assessee could be regarded as holding shares in the company, otherwise no
dividend would be payable to her by the company at all, and if that be so,
whatever tax was deducted at source by the company or its principal officer
from out of dividend payable by the company to the assessee would be tax paid
on behalf of the assessee and in respect of such tax deducted at source she would
be entitled to claim credit of the said amount under s. 199 of the I.T. Act.
It is true that the
expression "shareholder" occurring in s. 18(5) of the old Act (1922
Act) and s. 199 of the new Act (1961 Act) has been considered by the Supreme
Court; this court as well as the Andhra Pradesh High-Court as being referable
to a registered shareholder, that is to say, a holder of shares whose name has
been registered in the register of "members of the company, in three or
four decisions on which Mr. Joshi relied, but it must be pointed out that in
each one of those cases the court was concerned with the conflict that had
arisen between the legal ownership and the equitable ownership and it was in
the context of such conflict the question had arisen whether the equitable
owner of shares would also be entitled to the processing contemplated by s.
18(5) read with s. 16(2) of the old Act or by s. 199 of the new Act; for
instance the Supreme Court in Howrah Trading Co.'s case [1959] 36 ITR 215 was
concerned with the question as to whether the purchaser or transferee of shares
in whose name the shares had not yet been registered in the register of members
of the company was entitled to the grossing up contemplated by s. 18(5) read
with s. 16(2) of the Act or not. In terms it was a case where a person who had
purchased shares in a company under a blank transfer and in whose name the
shares had not been registered in the books of the company sought to obtain
benefit of grossing up process under s. 18(5) read with s. 16(2) of the 1922,
Act and the Supreme Court took the view that such a person was not a
"share holder" in respect of such shares within the meaning of s.
18(5) of the I.T. Act notwithstanding his equitable right to the dividend on
such shares. At page 219 the Supreme Court has observed thus :
"The words 'holder of
a share' ate really equal to the word 'shareholder' and the expression 'holder
of a share ' denotes, in so far as the company is concerned, only a person who as a shareholder,
has his name entered on the register of members."
and
this proposition was supported by an English decision as well as the provisions
of the Indian Companies Act. In other words, whenever there would be a conflict
between the legal ownership and the equitable ownership of a share, having
regard to the provisions of English law as also the provisions contained in the
Indian Companies Act, where trusts are not recognised, the shareholder would be
the person whose name has been registered with the company in the register of
members. Similar was the position in all the other three cases on which
reliance has been placed by Mr. Joshi. None of the decisions on which Mr. Joshi
has relied deals with the case of a holder or a bearer of share warrant or the
question whether such holder of share warrant could be regarded as a
shareholder for the purpose of s. 18(5) read with s. 16(2) of the old Act or s.
199 of the 1961 Act. The decisions, therefore, are clearly distinguishable and,
in our view, the question at issue which has been raised before us will haves
to be answered by having regard to the provisions which are to be found in ss.
114 and 115 of the Companies Act, 1956, read with the relevant articles, viz.,
arts. 52 and 55 of the article's of association of the company, and having regard
to those provisions it seems to us clear that the assessee in the instant case
will have to beregarded as a shareholder for the purpose of s. 199 of the I.T.
Act, 1961.
In
this view of the matter it is really unnecessary for us to consider the
question as to whether cl. (ii) of prov. to s. 199 would be applicable of not.
On
the alternative submission made by Mr. Dwarkadas, we find that he is on a
stronger ground. His alternative submission has been that eyen if it were
assumed for the purpose of argument that the holder of a share warrant cannot
be regarded as a shareholder within the meaning of s. 199 for the purpose of
claiming credit for the tax deducted at source, the assessee's case would fall
within the purview of s. 237, which deals with refund of excess tax, paid on
behalf of the assessee. S. 237 runs thus:
"237.Refunds.—If
any person satisfies the Income-tax Officer that the amount of tax paid by him
or on his behalf or treated as paid by him or on his behalf for any assessment
year exceeds the amount with which he is properly chargeable under this Act for
that year, he shall be entitled to a refund of the excess."
Now,
irrespective of the question whether the assessee could be regarded as a
shareholder or not in the sense of being a registered shareholder, it cannot be
disputed that because she held shares in the company specified in the share
warrants which were issued to her, the dividend became payable to her by the
company and while paying the dividend which was due to her tax was deducted by the principal officer of the company,
which deduction was admittedly at a higher rate than that at which the assessee
was liable to pay in respect of dividend income which she was entitled to
receive, and if that be so, it would be clear that the ITO should be satisfied
that the amount of tax paid by her or on her behalf for the assessment year in
question exceeded the amount for which she was properly chargeable for tax for
that year and in that situation she would be entitled to claim credit for the
excess tax paid by her or on her behalf to the income-tax department. In our
view, therefore., even on the basis of the alternative submission made by Mr.
Dwarkadas under s. 237, the assessee would be entitled to claim credit for the
excess tax paid by her in respect of dividend income receivable by her from the
company in the previous year relating to the assessment year in question.
Having regard to the above
discussion, the question that has been referred to us will be answered in the
affirmative and in favour of the assessee.
Mr. Dwarkadas says that he
is not pressing for costs since the assessee has not been charged by her legal
advisers; there will therefore, be no order as to costs.
[2005] 60 scl 604 (mad.)
HIGH COURT OF
v.
P. SATHASIVAM AND AR.
RAMALINGAM, JJ.
CMA NOS. 3188 AND 3223
OF 2004
AND CMP NOS. 17656 AND
17925 OF 2004
DECEMBER 30, 2004
Provisions of
sub-sections (1A) and (1C) of section 108 of Companies Act are directory in
nature
Section 111A, read with section 108, of the
Companies Act, 1956 - Transfer of shares - Rectification of register on -
Whether provisions of sub-sections (1A) and (1C) of section 108 are directory
and not mandatory in nature - Held, yes - Petitioner-GIIC had advanced loan to
respondent-company for which shares were pledged with petitioner - On failure
of company to pay loan, petitioner sought registration of transfer of pledged
shares in its name - Respondent registered part of shares but for balance
refused transfer on ground that provisions of sub-section (1C) of section 108
were not complied with by petitioner - CLB held that provisions of section
108(1C) were not mandatory and directed respondents to register transfer of
balance shares in name of petitioner - Whether since company never took plea
earlier at any stage that section 108(1C) had not been complied with and even
in counter filed before CLB, plea of section 108(1C) had not been raised, it
could be said that company had raised frivolous technical objection only to
prevent petitioner from realising its dues and, therefore, conclusion arrived
at by CLB was to be upheld - Held, yes
FACTS
The petitioner-GIIC had advanced a loan to the
respondent-company for which shares held in the names of promoters of the
company were pledged with the petitioner. Since the company committed default
in repayment of the loan amount, the petitioner requested the company to
transfer said shares in its name. The company had registered transfer of part
of the shares but failed to effect registration of transfer in respect of
remaining shares. According to respondents, the petitioner had failed to comply
with mandatory provisions of sub-section (1C) of section 108 and, therefore, the
company could not be compelled to register the transfer of shares until a
proper instrument of transfer duly stamped and executed had been delivered to
the company. The petitioner filed application under section 111A contending,
inter alia, that the requirements of sub-section (1C) being only directory, the
CLB, in exercise of powers vested in section 111A, may direct the company to
effect registration of the transfer of the remaining pledged shares in the name
of the petitioner. The CLB, in its impugned order, held that compliance of
sub-section (1C) was directory in nature and not mandatory and taking note of
the conduct of the company having waived all the requirements of sub-section
(1C) by way of effecting transfer of some of the shares pledged in the name of
the petitioner, directed the company to register the transfer of balance shares
in the name of the petitioner.
On appeal :
HELD
Insofar as sub-section (1C) is
concerned, if the transfer of shares falls within any one of the exempted cases
mentioned in that sub-section, the requirements as to presentation of the
instrument of transfer in favour of the prescribed authority and delivery
thereof to the company within the prescribed time limit, as contemplated in
sub-section (1A) are not applicable, provided the conditions stipulated in
sub-section (1C) are satisfied. In view of the same, if any bank or financial
institution or the Central Government or a State Government or any corporation
owned or controlled by the Central Government or a State Government, granting a
loan against the security of shares, intends to get such shares registered in
its own name, in the event of failure on the part of the borrower to repay the
amount loan, it shall complete the instrument of transfer and lodge it with the
company for registration of the transfer in its own name. In such a
circumstance, they will have to stamp or otherwise endorse on the instrument of
transfer the date on which the bank or financial institution decides to get
such share registered in its own name and the instrument so stamped or endorsed
will have to be delivered to the company, together with the share certificate,
for registration of the transfer within two months from the date so stamped or
endorsed. It was not in dispute that the instruments of transfer were neither
stamped nor endorsed by the petitioner, as required under sub-section (1C),
however, stamped by the prescribed authority contemplated under sub-section
(1A). [
As rightly observed by the
Single Judge of the Karnataka High Court in Mukundlal Manchanda v. Prakash
Roadlines Ltd. [1971] 72 Comp. Cas. 575, the requirement of sub-section
(1A)(b)(ii) has to be read reasonably, so as to enable its smooth functioning;
a delivery of instrument of transfer within a reasonable time should be held as
a proper delivery. Further, where the company opines that the instrument of
transfer has become stale and that it is improper to act upon it, the
instrument of transfer has to be held as liable to be ignored. Further, even
the belated delivery can be acted upon under certain circumstances while moving
the Central Government under sub-section (1) of section 108(1). In the light of
the said provision, even though the discretion lies in the company either to
recognise the transfer or not to recognise it depending upon the staleness of
the instrument, the affected person can very well move the Central Government
under sub-section (1D) by explaining the circumstances under which the delay
occurred and the hardship that resulted by the non-recognition of the transfer.
It was rightly concluded that in the light of the scheme of section 108,
particularly after the insertion of sub-sections (1A), (1B), (1C) and (1D), the
Courts have to bear in mind that the trivialities would not render an act
futile and technical formalities required to be complied with for a valid
transaction cannot outweigh the importance to be given to the substance of the
transaction. Though the matter was taken up by way of appeal before the
Division Bench of the Karnataka High Court, the Division Bench had not gone
into the said aspect, namely, whether mandatory or directory, however,
confirmed the judgment of the Single Judge on merits. In the light of the above
discussion, considering the scheme of the said provisions, the view expressed
by the Single Judge in Mukundlal Manchanda’s case (supra) was to be upheld and
it was to be held that except sub-section (1) of section 108, other provisions,
namely, (1A) and (1C) are directory and not mandatory in nature. [
As regards maintainability of
the appeal and the rights of pledger/pledgee, the materials furnished by the
petitioner would show that on 2-1-2001 all the share certificates with transfer
form were delivered. The total number of shares pledged were 25,92,800. Out of
that, 2,99,800 were transferred within the time and the transfer forms were
submitted belatedly. The transfer with regard to the other shares had also been
approved. The shares had only to be converted into demat form. That was made
clear by letter dated 23-7-2003 and thereafter several letters were written for
completion of the transfer. Subsequently, a legal notice was also issued on
29-7-2003. The company never took the plea that section 108(1C) had not been
complied with. Not a single defect had been specified. Even in the counter
filed before the CLB, the plea of section 108(1C) had not been raised. [
Admittedly, the shares were
owned by two investment companies and one individual. The abovesaid transferees
had not objected to the transfer. Even in the suits filed by the pledgers
before the
The conduct of the company was
also not appreciable. They borrowed a sum of Rs. 5 crores and repaid only Rs. 2.5
lakhs. It was the stand of the company that the loan would never have been
given, but for the pledge of the shares. It was not disputed that the
petitioner was a State Government undertaking and the amounts advanced were
public fund. The company had raised frivolous technical objection only to
prevent the petitioner from realising its dues. [Para 24]
Since the Court had
entertained the appeals on satisfying them and after formulating questions of
law and the petitioner in the appeals was put on notice regarding the same and
both parties were heard on the question of law, the appeals were maintainable
under section 10F. [Para 25]
In the light of the above
discussion, the conclusion arrived at by the CLB was to be upheld.
Consequently, both the appeals were to be dismissed as devoid of merits. [Para
28]
CASES REFERRED TO
Mannalal Khetan v. Kedar Nath Khetan [1977] 47
Comp. Cas. 185 (SC) (para 9), Union of India v. International Trading Co. AIR
2003 SCW 2828 (para 9), Maqbul Ahmad v. Onkar Pratap AIR 1935 PC 85 (para 10),
D.M. Thippaswamy v. Mysore Revenue Appellate Tribunal AIR 1972 Mys. 50 (para
10), Miss AV. J. Cama v. Banwarilal Agarwal AIR 1953 Nag. 81 (para 10), M.
Pentiah v. Muddala Veeramallapa AIR 1961 SC 1107 (para 10), John H.
Arseculeratne v. J.B.M. Perera AIR 1928 PC 273 (para 10), Bhavnagar University
v. Palitana Sugar Mill (P.) Ltd. AIR 2003 SC 511 (para 10), Rohit Pulp &
Paper Mills Ltd. v. Collector of Central Excise AIR 1991 SC 754 (para 10), Wang
v. IRC 1995 All ER 367 (para 10), Administrator, Municipal Committee v. Ramji
Lal Bagla [1995] 5 SCC 272 (para 14), Mohan Singh v. International Airport
Authority of India [1997] 9 SCC 132 (para 15), DLF Universal Ltd. v.
Appropriate Authority AIR 2000 SC 1985 (para 16), Sashikant Singh v. Tarkeshwar
Singh [2002] 5 SCC 738 (para 17), P.T. Rajan v. T.P.M. Sahir [2003] 8 SCC 498
(para 18), Mukundlal Manchanda v. Prakash Roadlines Ltd. [1991] 72 Comp. Cas.
575 (Kar.) (para 19) and Mukundlal Manchanda v. Prakash Roadlines Ltd. [1995] 1
Comp. LJ. 126 (Kar.) (para 19).
S. Alagiriswamy, S. Murugan and P.H. Aravindh
Pandian for the Appellant. Arvind
P. Dattar and Shivakumar for the Respondent.
ORDER
P. Sathasivam, J. - By consent of all the parties, the Appeals themselves
have (been) taken up for disposal. M/s. Dove Investments Private Limited,
Mumbai-21; M/s. Maxworth Investments Private Limited, Chennai-34; and Mr. P.N.
Mohan, partner of M/s. Sandhya Priya Investments, Chennai-41-respondents 2 to 4
in Company Petition No.13/111A/S.R.B. of 2003 on the file of Company Law Board,
Southern Region Bench, Chennai, aggrieved by the order dated 23-8-2004,
directing M/s. Sterling Holiday Resorts-first respondent therein to register
transfer of 22,93,000 shares in the name of the M/s. Gujarat Industrial
Investment Corporation Ltd., petitioner therein within 30 days of receipt of
the said order, have preferred C.M.A. No. 3188 of 2004 under section 10F of the
Companies Act, 1956. Questioning the very same order, M/s. Sterling Holiday
Resorts, first respondent therein filed C.M.A. No. 3223/2004. Since both the
appeals arise against the very same order of the Company Law Board, the same
are being disposed of by the following common order :
BRIEF FACTS
“For convenience, we shall refer the parties as
arrayed before the Company Law Board. M/s. Gujarat Industrial Investment
Corporation Limited/petitioner is a Government of Gujarat Undertaking, filed
Company Petition No. 13/111A/SRB of 2003 under section 11A of the Companies
Act, 1956 (hereinafter referred to as ‘the Act’) against M/s. Sterling Holiday
Resorts (India) Limited (‘Company’ in short) and three others, namely, M/s.
Dove Investments Private Limited, M/s. Maxworth Investments Private Ltd., and
P.N. Mohan before the Company Law Board, Southern Region Bench, Chennai to
register the transfer of 22,93,000 shares of the company pledged by respondents
2 to 4 in favour of the petitioner. It is seen that the Gujarat Industrial
Investments Corporation Ltd., a wholly owned Government of Gujarat financial
institution advanced a loan of Rs. 5 Crores in 1996 to the company for conduct
of its business, for which the company offered the shares held in the name of
respondents 2 to 4 being the Company’s promoters and associates, by pledging the
shares (A-2 to A-9). Since the Company committed default in repayment of the
loan amount, the petitioner lodged with the Company, the original certificates
of the pledged shares together with duly stamped and executed instruments of
transfer for effecting registration of the transfer thereof in their name. It
is the grievance of the petitioner that though the Company had registered the
transfer of 2,99,800 shares pledged by respondents 2 and 3, failed to effect
the registration of the transfer in respect of the remaining 22,93,000 shares.
It is also the claim of the petitioner that in spite of repeated demands and
lawyer’s notice dated 29-7-2003, calling upon the company to transfer the
balance 22,93,000 shares in the name of the petitioner in demat form, the
Company failed and refused to register the transfer of the pledged shares in
favour of the petitioner. In order to circumvent the claim of the petitioner,
the respondents 2 to 4 have filed Civil Suits in O.S. Nos. 3740, 3741 and 3742
of 2000 on the file of City Civil Court, Chennai for permanent injunction
restraining the Company from effecting the transfer of the pledged shares in
favour of the petitioner. The impugned shares are freely transferable and the
conduct of the respondents in not effecting registration of the transfer of the
pledged shares is with an oblique motive and without sufficient cause and,
therefore, the petitioner being a pledgee is entitled for registration of
shares in its favour on default committed by the Company.”
2. The
respondents 2 to 4 filed a common counter affidavit wherein it is stated that
the petitioner failed to comply with the provisions of sub-section (1C),
according to which the instruments of transfer ought to have been stamped or
endorsed by the petitioner and thereafter delivered them to the Company
together with the share certificates for registration of the transfer within
two months from the date so stamped or endorsed. The requirements of
sub-section (1C)(b)(iv)(1)(c)(2), being mandatory have not been duly satisfied
and therefore the Company is not under an obligation to effect the transfer of
shares in the name of the petitioner. The Company cannot be compelled to
register the transfer of shares until a proper instrument of transfer duly
stamped and executed has been delivered to the Company. By virtue of the deed
of pledge executed by the respondents 2 to 4, the petitioner could dispose of
the pledged shares either by public auction or private contract and appropriate
the sale proceed towards the dues of the Company. Therefore, the petitioner
does not have the right to get the shares transferred in its name without a
corresponding reduction in loan obligations.
3. The
petitioner filed a rejoinder stating that the plea of non-compliance with the
requirements of section 108(1C) has neither been raised before the Civil Court
nor in the present proceedings. The Company has already given effect to the
transfer of 2,99,800 shares. Further, the Company by letter dated 23-7-2001
admitted that it is in the process of transferring and converting the balance
of 22,93,000 shares into marketable lots. Their only grievance in the Civil
Suit is that the petitioner is attempting to transfer the pledged shares in its
favour at a value far below the market value. The Company has, therefore,
waived its rights to enforce the requirements of sub-section (1C) of section
108. The requirements of section 108(1C) are only directory and not mandatory.
The petitioner has every right to effect the transfer of the impugned shares in
its favour, in view of the default committed by the Company. As against the
loan amount of Rs. 5 Crores availed in 1996, the present outstanding amount as
on August, 2003 payable by the Company comes to Rs. 38,84,50,793. The Company
is neither settling the dues nor giving effect to the transfer of the pledged
shares in the name of the petitioner in terms of the loan agreement, thereby
jeopardising the public interest, on account of the huge public money blocked
in the subject transaction. Therefore, no sympathy should be shown to a chronic
defaulter and the requirements of sub-section (1C) being only directory the
Company Law Board in exercise of powers vested in section 111A may direct the
company to effect registration of the transfer of the remaining pledged shares
in the name of the petitioner.
4. In the
light of the stand taken by all the parties and after considering the relevant
provisions as well as judicial decisions thereon, the Company Law Board by the
order under challenge after holding that compliance of section (1C) is
directory in nature and not mandatory and taking note of the conduct of the
company having waived all the requirements of sub-section (1C), directed the
Company to register the transfer of 22,93,000 shares in the name of the
petitioner within 30 days of the receipt of the said order. Questioning the
same, the Company as well as the investors have preferred the above appeals.
5. Heard
Mr. S. Alagiriswamy, learned Senior Counsel for the appellants in C.M.A. No.
3188/2004, Mr. P.H. Aravindh Pandian, learned counsel for the appellant in
C.M.A. No. 3223/2004 and Mr. Arvind P. Datar, learned Senior Counsel for the
first respondent/Gujarat Industrial Investment Corporation Limited.
6. After
taking us through the Company Petition, counter, rejoinder, the details
regarding Civil Suits, impugned order of the Company Law Board and relevant
provisions of the Companies Act, Mr. A. Alagiriswamy, learned Senior Counsel
for the investors, and Mr. P.H. Aravindh Pandian, learned counsel for the
Company, have raised the following contentions :
“(i) Whether the Company Law Board was correct
in holding that the provisions of section 108, except sub-section (1) of the
Companies Act, 1956 are only directory and not mandatory in nature ?
(ii) Whether the Company Law Board was right in
arriving a conclusion that the share transfer has to be registered by the
appellant in spite of the fact that certain provision of law has not been duly
complied with by M/s. Gujarat Industrial Investment Corporation Limited/petitioner
before the Company Law Board ?”
7. On the
other hand, Mr. P. Arvind Datar, learned Senior Counsel appearing for the
Gujarat Industrial Investment Corporation/petitioner, would submit that section
108(1C) of the Act is directory and not mandatory. Even otherwise, according to
him, in view of the conduct of the company and also of the fact that transfers
would complete only if procedural formalities were complied with, the
conclusion and ultimate direction of the Company Law Board cannot be faulted
with.
8. We have carefully considered the claim of
both parties with reference to the materials placed and the statutory
provisions applicable to them.
9. Before considering the rival contentions, it
would be useful to refer the relevant provisions of the Companies Act, 1956
applicable to the case on hand :
“108. Transfer not to be registered except on
production of instrument of transfer—(1) A company shall not register a
transfer of shares in, or debentures of, the company, unless a proper
instrument of transfer duly stamped and executed by or on behalf of the
transferor and by or on behalf of the transferee and specifying the name,
address and occupation, if any, of the transferee, has been delivered to the
company along with the certificate relating to the shares or debentures, or if
no such certificate is in existence, along with the letter of allotment of the
shares or debentures :
Provided that where, on an
application in writing made to the company by the transferee and bearing the
stamp required for an instrument of transfer, it is proved to the satisfaction
of the board of directors that the instrument of transfer signed by or on
behalf of the transferor and by or on behalf of the transferee has been lost,
the company may register the transfer on such terms as to indemnity as the
Board may think fit :
Provided further
that nothing in this section shall prejudice any power of the company to
register as shareholder or debenture-holder any person to whom the right to any
shares in, or debentures of, the company has been transmitted by operation of
law.
(1A) Every instrument of transfer of shares
shall be in such form as may be prescribed, and—
(a) every such form shall, before it is signed
by or on behalf of the transferor and before any entry is made therein, be
presented to the prescribed authority, being a person already in the service of
the Government, who shall stamp or otherwise endorse thereon the date on which
it is so presented, and
(b) every instrument of transfer in the
prescribed form with the date of such presentation stamped or otherwise
endorsed thereon shall, after it is executed by or on behalf of the transferor
and the transferee and completed in all other respects, be delivered to the
company,—
(i) in the case of shares dealt in or quoted
on a recognised stock exchange, at any time before the date on which the
register of members is closed, in accordance with law, for the first time after
the date of the presentation of the prescribed form to the prescribed authority
under clause (a) or within twelve months from the date of such presentation,
whichever is later;
(ii) in
any other case, within two months from the date of such presentation.
|
|
(1B)** |
** |
** |
(1C) Nothing
contained in sub-sections (1A) and (1B) shall apply to—
(A) any
share—
(i) which is held by a company in any
other body corporate in the name of a director or nominee in pursuance of
sub-section (2), or as the case may be, sub-section (3) of section 49, or
(ii) which is held by a corporation, owned or
controlled by the Central Government or a State Government, in any other body
corporate in the name of a director or nominee, or
(iii) in respect of which a declaration has
been made to the public trustee under section 153B, if—
(1)
the company or corporation, as the case
may be, stamps or otherwise endorses, on the form of transfer in respect of
such share, the date on which it decides that such share shall not be held in
the name of the said director or nominee or, as the case may be, in the case of
any share in respect of which any such declaration has been made to the public
trustee, the public trustee stamps or otherwise endorses, on the form of
transfer in respect of such share under his seal, the date on which the form is
presented to him, and
(2) the
instrument of transfer in such form, duly completed in all respects, is
delivered to the—
(a) body corporate in whose share such company
or corporation has made investment in the name of its director or nominee, or
(b) company in which such share is held in
trust, within two months of the date so stamped or otherwise endorsed; or
(B) any
share deposited by any person with—
(i) the
State Bank of India, or
(ii) any
scheduled bank, or
(iii) any banking company (other than a
scheduled bank) or financial institution approved by the Central Government by
notification in the Official Gazette (and any such approval may be accorded so
as to be retrospective to any date not earlier than the 1st day of April,
1966), or
(iv) the Central Government or a State Government
or any corporation owned or controlled by the Central Government or a State
Government,
by
way of security for the repayment of any loan or advance to, or for the
performance of any obligation undertaken by, such person, if—
(1)
the bank, institution, Government or
corporation, as the case may be, stamps or otherwise endorses on the form of
transfer of such share—
(a) the
date on which such share is returned by it to the depositor, or
(b) in the case of failure on the part of
the depositor to repay the loan or advance or to perform the obligation, the
date on which such share is released for sale by such bank, institution,
Government or corporation, as the case may be, or
(c) where the bank, institution,
Government or corporation, as the case may be, intends to get such share
registered in its own name, the date on which the instrument of transfer
relating to such share is executed by it; and
(2) the instrument of transfer in such form, duly completed in all respects,
is delivered to the company within two months from the date so stamped or
endorsed.”
Among the above mentioned provisions, we have to see whether the entire section 108 including (1C) is mandatory or section 108(1) alone is mandatory. We have already referred to the fact that the petitioner before the Company Law Board is the Government of Gujarat Undertaking registered under the Companies Act and that the provisions of State Financial Corporations Act, 1951 are made applicable to it. It is not in dispute that the Company, namely, Sterling Holiday Resorts (India) Limited had availed a loan of Rs. 4.5 Crores during the year 1996 and as per the security for the same, the investors had pledged their respective shares in the petitioner Corporation to the extent of 25,92,800 in favour of Gujarat Industrial Investment Corporation Limited. Since the Company had failed to repay the loan, the petitioner had exercised its powers under the pledged Agreement and Power of Attorney duly executed by the respondents and requested them to transfer those shares in its name. Since there is no response from the Company even after repeated registered notices and reminders, the petitioner had filed a petition under section 111A of the Companies Act before the Company Law Board. It is the claim of the Company that the provisions contained in section 108(1C) of the Act are mandatory, and without strict compliance of which, the petitioner cannot seek for the relief of the registration of the remaining 22,93,000 shares in favour of the petitioner though it had effected transfer of 2,99,800 shares. On the other hand, it is the claim of the petitioner that the provisions of sub-section (1C) of section 108 of the Act are only directory and not mandatory, and that moreover the requirement of which is waived by the Company by way of effecting the transfer of 2,99,800 shares out of 25,92,800 pledged shares in the name of the petitioner. Sub-section (1) of section 108 provides that a Company shall not register a transfer of shares in the company, unless a proper instrument of transfer duly stamped and executed by or on behalf of the transferor and by or on behalf of the transferee has been delivered to the company. Sub-section (1) provides that a company shall not register a transfer of shares in the company, unless a proper instrument of transfer duly stamped or executed by or on behalf of the transferor and by or on behalf of the transferee has been delivered to the company. Though several decisions have been cited on either side, the decision of the Apex Court in Mannalal Khetan v. Kedar Nath Khetan [1977] 47 Comp. Cas. 185 is relevant wherein the Supreme Court held that the provisions contained in section 108(1) are mandatory. By heavily relying on the said decision, it was contended that therefore the Company cannot be compelled to register the transfer of shares until the mandatory requirements of law are complied with. As per section 108(1A)(a) every instrument of transfer, before it is signed by or on behalf of transferor, and before any entry is made therein, be presented to the ‘prescribed authority’, who shall stamp or otherwise endorse thereon the date on which it is presented to him. After an instrument is duly dated by the prescribed authority and completed in all respects, it shall be delivered to the company for registration of the transfer, together with related certificate of shares or the letter of allotment, within the time limit specified in clause (b) of sub-section (1A). In sub-section (1A) and sub-section (1C) two months time limit has been prescribed for presentation, stamping or compliance of all other conditions. It is the categorical claim of the Company and the investors that sub-section (1C) has not been fulfilled since the instrument is not duly stamped by the prescribed authority and not presented within the time prescribed. There is no obligation on the part of the company to register the transfer of 22,93,000 shares in the name of the petitioner as directed by the Company Law Board. At the foremost, Mr. P.H. Arvindh Pandian, learned counsel appearing for the Company, by relying on a decision in Union of India v. International Trading Co. AIR 2003 SCW 2828, would contend that merely because the Company had registered the transfer of 2,99,800 shares at the first instance, it cannot be compelled to commit a wrong action. The following statement of law made in para 14 of the said decision has been pressed into services (para 14).
“14. A party cannot claim that since something
wrong has been done in another case, direction should be given for doing
another wrong. It would not be setting a wrong right, but would be perpetuating
another wrong. In such matters there is no discrimination involved. The concept
of equal treatment on the logic of Article 14 of the Constitution of India,
1950 cannot be pressed into service in such cases. What the concept of equal
treatment presupposes is existence of similar legal foothold. It does not
countenance repetition of a wrong action to bring both wrongs on par. Even if
hypothetically it is accepted that wrong has been committed on some other cases
by introducing a concept of negative equality respondents cannot strengthen
their case. They have to establish strength of their case on some other basis
and not by claiming negative equality.”
On going through the factual details in that case and considering the fact that in the present case the said objection was admittedly not raised before and that a portion of the shares have been transferred and registered in the name of the petitioner without any objection, we are of the view that the principle referred above is not applicable to the case on hand.
10. Regarding compliance of sub-section (1C) as
well as fulfilment of certain conditions ‘within the prescribed time’, Mr. P.H.
Aravindh Pandian has heavily relied on the following decisions :
(i) Maqbul Ahmad v. Onkar Pratap AIR 1935 PC
85; (ii) D.M. Thippaswamy v. Mysore Revenue Appellate Tribunal AIR 1972 Mys.
50; (iii) Miss AV. J. Cama v. Banwarilal Agarwal AIR 1953 Nag. 81; (iv) M.
Pentiah v. Muddala Veeramallapa AIR 1961 SC 1107; (v) John H. Arseculeratne v.
J.B.M. Perera AIR 1928 PC 273; (vi) Bhavnagar University v. Palitana Sugar Mill
(P.) Ltd. AIR 2003 SC 511; (vii) Rohit Pulp & Paper Mills Ltd. v. Collector
of Central Excise AIR 1991 SC 754; (viii) Wang v. IRC 1995 All ER 367.
In Maqbul Ahmad v. Onkar Pratap AIR 1935 PC
85, it is stated that while interpreting Statutes, when an Act which in some
limited respects gives the Court a statutory discretion, there cannot be
implied in the Court, outside the limits of the Act, a general discretion to
dispense with its provisions.
11. The decision reported in D.M. Thippaswamy v.
Mysore Revenue Appellate Tribunal AIR 1972 Mys. 50 speaks about time limit
i.e., 30 days prescribed for filing appeal. The said decision is not helpful to
the case of the company. In that case, the Appeal has to be filed within 30
days after the receipt of communication and factually it was found that the
appeal has not been filed beyond 30 days. Even if there is any doubt about the
matter, the Court should lean in favour of the person who is given the right of
appeal.
12. In Miss AV. J. Cama v. Banwarilal Agarwal AIR
1953 Nag. 81, a learned Single Judge of Nagpur High Court has given explanation
for the expression ‘at any time’ stipulated in section 428(1) of City of Nagpur
Corporation Act, 1948. According to him, the words ‘at any time’ made it clear
that a voter is entitled to make an application at any time after the cause of
action accrues. On going through the factual details, absolutely there is no
dispute in the principles laid down in John H. Arseculeratne v. J.B.M. Perera
AIR 1928 PC 273; M. Pentiah v. Muddala Veeramallapa AIR 1961 SC 1107; Bhavnagar
University v. Palitana Sugar Mill (P.) Ltd. AIR 2003 SC 511; and Rohit Pulp
& Paper Mills Ltd. v. Collector of Central Excise AIR 1991 SC 754.
13. It is relevant to note the decision rendered
in Wang v. IRC 1995 All ER 367. The following statement is relevant for our
consideration :
“Having reviewed the authorities cited by the
taxpayer in this appeal, not all of which are referred to in this opinion,
their Lordships consider that when a question like the present one arises—an
alleged failure to comply with a time provision—it is simpler and better to
avoid these two words ‘mandatory’ and ‘directory’ and to ask two questions. The
first is whether the Legislature intended the person making the determination
to comply with the time provision, whether a fixed time or a reasonable time.
Secondly, if so, did the Legislature intend that a failure to comply with such
a time provision would deprive the decision-maker of jurisdiction and render
any decision which he purported to make null and void ?”
14. Mr. Aravind P. Datar has also relied on the
following decisions to find out whether a particular provision is mandatory or
directory. The first decision relied on by him is in Administrator, Municipal
Committee v. Ramji Lal Bagla [1995] 5 SCC 272 wherein Their Lordships have held
that absence of provision for consequence in case of non-compliance with the
requirements prescribed would indicate directory nature despite use of word
‘shall’. They further held that one of the well-accepted tests for determining
whether a provision is directory or mandatory is to see whether the enactment provides
for the consequence flowing from non-compliance with the requirement
prescribed. In the absence of any specific provision namely, that
non-compliance therewith results in nullification of the acquisition which has
to be construed that those provision is only directory in nature despite use of
the word ‘shall’ in section 44-A of Punjab Town Improvement Act, 1922.
15. In Mohan Singh v. International Airport
Authority of India [1997] 9 SCC 132 regarding the use of word ‘shall’ or ‘may’.
The Supreme Court held that the distinction of mandatory compliance or
directory effect of the language depends upon the language couched in the
statute under consideration and its object, purpose and effect. The distinction
reflected in the use of the word ‘shall’ or ‘may’ depends on conferment of
power. General rule of law is that where a general obligation is created by
statute and statutory remedy is provided for violation, statutory remedy is
mandatory. The scope and language of the statute and consideration of policy at
times may, however, create exception showing that the Legislature did not
intend a remedy to be exclusive. The language is the medium of expressing the
intention and the object that particular provision or the Act seeks to achieve.
Therefore, it is necessary to ascertain the intention. The word ‘shall’ is not
always decisive. Regard must be had to the context, subject-matter and object
of the statutory provision in question in determining whether the same is
mandatory or directory. According to Their Lordships, no universal principle of
law could be laid in that behalf as to whether a particular provision or
enactment shall be considered mandatory or directory and it is the duty of the
Court to try to get at the real intention of the Legislature by carefully
analysing the whole scope of the statute or section or a phrase under
consideration. According to them, the question as to whether the statute is
mandatory or directory depends upon the intent of the Legislature and not
always upon the language in which the intent is couched. The meaning and
intention of the Legislature would govern design and purpose the Act seeks to
achieve. While considering the language used under section 41 and section 6 of
the Land Acquisition Act, 1894 in para 26 Their Lordships have held :
“26. The word ‘shall’, though prima facie gives
impression of being of mandatory character, it requires to be considered in the
light of the intention of the Legislature by carefully attending to the scope
of the statute, its nature and design and the consequences that would flow from
the construction thereof one way or the other. In that behalf, the Court is
required to keep in view the impact on the profession, necessity of its
compliance; whether the statute, if it is avoided, provides for any contingency
for non-compliance; if the word ‘shall’ is construed as having mandatory
character, the mischief that would ensue by such construction; whether the
public convenience would be subserved or public inconvenience or the general
inconvenience that may ensue if it is held mandatory and all other relevant
circumstances are required to be taken into consideration in construing whether
the provision would be mandatory or directory. If an object of the enactment is
defeated by holding the same directory, it should be construed as mandatory
where if by holding it mandatory serious general inconvenience will be created
to innocent persons of general public without much furthering the object of
enactment, the same should be construed as directory but all the same, it would
not mean that the language used would be ignored altogether. Effect must be
given to all the provisions harmoniously to suppress public mischief and to
promote public justice.”
After holding so, they concluded that though
compliance with publication of the 3 steps required under section 4(1) is
mandatory while exercising the power of eminent domain under section 4(1), when
the appropriate Government exercises the power under sub-section (4) of section
17 dispensing with the enquiry under section 5A and directs the Collector to
take possession of the land before making the award as the lands are needed
urgently either under sub-section (1) or (2) thereof, it is not mandatory to
publish the notification under section 4(1) in the newspapers and giving of
notice of the substance thereof in the locality; the last of the dates of
publication should not be the date for the purpose exercising the power under
section 17(4). They further held that this interpretation would subserve the
public purpose and suppress mischief of non-compliance and seeks to elongate
the public purpose, namely, taking immediate possession of the land needed for
the public purpose, envisaged in the notification.
16. In DLF Universal Ltd. v. Appropriate
Authority AIR 2000 SC 1985, the Supreme Court after considering the language
used in section 269UC(3) of Income-tax Act, has held that it is only directory
and not mandatory.
17. In Sashikant Singh v. Tarkeshwar Singh [2002]
5 SCC 738, Their Lordships while considering the requirement under sub-section
(1) of section 319 of the Code of Criminal Procedure that the person summoned
‘could be tried together with the accused’ is directory, whereas requirement
under sub-section (4) of section 319 regarding de novo trial of such person is
mandatory, have held that whether a particular provision is mandatory or
directory, the legislative intention has to be ascertained by Court having
regard to the whole scope of the statute. They further held that where a
statute does not consist merely of one enactment, but contains a number of
different provisions regulating the manner in which something is to be done, it
often happens that some of these provisions are to be treated as being
directory only, while others are to be considered absolute and essential; that
is to say, some of the provisions may be disregarded without rendering invalid
the thing to be done, but others not. It was further held that the mandate of
law of fresh trial is mandatory, whereas the mandate that newly added accused could
be tried together with the accused is directory.
18. In P.T. Rajan v. T.P.M. Sahir [2003] 8 SCC
498, while considering certain provisions in the Representation of the People
Act, 1951, the Supreme Court has held that even if a statute specifies a time
for publication of the electoral roll, the same by itself could not have been
held to be mandatory and such a provision would be directory in nature. The
Supreme Court further held that where a statutory functionary is asked to
perform a statutory duty within the time prescribed therefor, the same would be
directory and not mandatory. They also held that a provision in a statute which
is procedural in nature although employs the word ‘shall’ may not be held to be
mandatory if thereby no prejudice is caused and that the Court cannot supply
casus omissus.
19. In the light of the various decisions
relating to use of the word ‘shall’ or ‘may’ in different statutes, now let us
consider the judgment of the Supreme Court in Mannalal Khetan v. Kedar Nath
Khetan [1977] 47 Comp. Cas. 185 and the judgments of the Karnataka High Court
rendered by a Single Judge in Mukundlal Manchanda v. Prakash Roadlines Ltd.
[1991] 72 Comp. Cas. 575 as well as by a Division Bench in Mukundlal Manchanda
v. Prakash Roadlines Ltd. [1995] 1 Comp. LJ. 126 (Kar.).
20. In Mannalal Khetan’s case (supra), the
question that was considered by the Supreme Court was whether the provisions of
section 108 of the Companies Act, 1956 are mandatory in regard to transfer of
shares. Mannalal Khetan, appellant before the Supreme Court, filed a petition
in the High Court, Allahabad under section 155 of the Companies Act, 1956
against the respondents, namely, Kedar Nath Khetan and others contending that
the transfers of all the shares in the Company’s register were illegal because
the transfers were without any proper instrument of transfer. He also contended
that the transfers were in contravention of the mandatory provisions of section
108 of the Act. The Single Judge of Allahabad High Court, before whom the petition
was originally filed seeking rectification of the register of members by
annulling shares transfer register pursuant to the resolution of the board of
directors of the first respondent therein and for enforcement of the procedure
prescribed in Article 7 of the Articles of Association of the first
respondent-company, issued direction to the Company to rectify the register of
its members by removing the names of respondents 1 and 2 and to restore the
names of the original shareholders. Aggrieved by the said order, the
respondents preferred an appeal before the Division Bench of the same Court
(Allahabad High Court). The Division Bench, while setting aside the order
passed by the Company Judge and dismissing the applications of the appellant,
held that the provisions contained in section 108 of the Act are directory and
not mandatory. Against the order of the Division Bench, the appellant preferred
appeal to the Supreme Court. The Supreme Court considered sub-section (1) of
section 108, particularly the provisos made therein, and held that the words
‘shall not register’ are mandatory in character, since the negative form of the
language is used therein. Their Lordships have also held that negative words
are clearly prohibitory and are ordinarily used as a legislative device to make
a statutory provision imperative. Ultimately, the Supreme Court has held that
“the provisions contained in section 108 of the Act are directory because
non-compliance with section 108 of the Act are, for the reasons indicated earlier,
mandatory. The High Court erred in holding that the provisions are directory”.
Since the said decision of the Supreme Court is with reference to the very same
provisions namely section 108 of the Act, we considered the entire judgment
dated 25-11-1976. Except sub-section (1) of section 108, Their Lordships have
not considered sub-sections (1A), (1B), (1C) and (1D), which were inserted in
Companies (Amendment) Act, 1965, which came into force from 1-4-1966. In other
words, though on the date of the judgment of the Supreme Court i.e., on
25-11-1976, the inserted provisions, namely (1A), (1B), (1C) and (1D) were
available for consideration. The Lordships have not expressed specific opinion
with reference to those inserted provisions. In other words, the Supreme Court
was interpreting section 108(1) as it stood at the time of the impugned
transaction therein and it had no occasion to make any observation concerning
sub-sections (1A), (1B), (1C) and (1D) of section 108 of the Act. In such a
circumstance, as rightly contended by Mr. Arvind P. Datar, learned Senior
Counsel for the petitioner and concluded by the Company Law Board, in Mannalal
Khetan’s case (supra), the Supreme Court had no occasion to make any
observation concerning sub-section (1A) of section 108, in view of the fact
that the Supreme Court was dealing with the case concerning section 108 when it
did not contain sub-section (1A). Sub-section (1B) is not relevant in the
context of the subject dispute. In so far as sub-section (1C) is concerned, if
the transfer of shares falls within any one of the exempted cases mentioned in
that sub-section, the requirements as to presentation of the instrument of
transfer in favour of the prescribed authority and delivery thereof to the
company within the prescribed time limit, as contemplated in sub-section (1A)
are not applicable, provided the conditions stipulated in sub-section (1C) are
satisfied. In view of the same, any bank or financial institution or the
Central Government or a State Government or any corporation owned or controlled
by the Central Government or a State Government, granting a loan against the
security of shares, intends to get such shares registered in its own name, in
the event of failure on the part of the borrower to repay the amount loan, it
shall complete the instrument of transfer and lodge it with the company for
registration of the transfer in its own name. In such a circumstance, they will
have to stamp or otherwise endorse on the instrument of transfer the date on
which the bank or financial institution decides to get such share registered in
its own name and the instrument so stamped or endorsed will have to be
delivered to the company, together with the share certificate, for registration
of the transfer within two months from the date so stamped or endorsed. It is
not in dispute that the instruments of transfer are neither stamped nor
endorsed by the petitioner, as required under sub-section (1C), however,
stamped by the prescribed authority contemplated under sub-section (1A). As
rightly pointed out by the Company Law Board, we have to consider whether the
delivery of the instruments of transfer beyond 2 months from the date so
stamped as specified in sub-section (1C) is proper, for which the learned
Senior Counsel for the petitioner heavily relied on a decision of the Karnataka
High Court in Mukundlal Manchanda v. Prakash Roadlines Ltd. [1991] 72 Comp.
Cas. 575. Though it is a judgment of the learned Single Judge of the Karnataka
High Court, he had an occasion to consider the very same provisions and similar
questions. The learned Judge considered the decision of the Supreme Court in
Mannalal Khetan’s case (supra) wherein the Supreme Court has held that the
provisions in section 108 are mandatory. The learned Judge was also aware that
the transactions in Mannalal Khetan’s case (supra) were prior to the amendment
made in the year 1965-66 and sub-sections (1A), (1B), (1C) and (1D) were
introduced for the first time by the Companies (Amendment) Act, 1965 [Act
31/1965]. The learned Judge has observed that the Supreme Court was
interpreting the provisions of section 108 as it stood at the time of the
impugned transaction therein and the Supreme Court had no occasion, therefore,
to make any observation concerning sub-section (1A) of section 108. As said
earlier, since the learned Judge dealt with the very same question which is
being canvassed before us, we considered the facts of that case and the
ultimate decision arrived at therein. The following conclusion of the learned
Judge is relevant :
“The question therefore is, whether the bar
under section 108(1) is attracted to the requirements as to the period stated
in clause (b) of sub-section (1A). Can it be said that, when a blank transfer form
is stamped, and, thereafter, it is signed by the transferor and the transferee,
the form still continues to be blank ? I think not.
Delivery of the instrument of transfer to the
company, no doubt, is a mandatory requirement as per section 108(1). But the
time limit of two months stated in sub-section (1A)(b)(ii) does not say that
the company shall not accept the instrument of transfer delivered thereafter.
The stipulation of time for the performance of an act is not read as a
mandatory stipulation under certain circumstances. If the person who has to
perform the act has no control over the event which would result in the expiry
of the period, then, he cannot be defeated of his rights by insisting on the
performance being within the prescribed period. Cases may arise when delay may
occur in transit, i.e., even though the instrument of transfer is sent
immediately on execution, it is not delivered by the postal department or the
courier, or the movement is delayed for reasons beyond the control of the person
sending the instrument; it is also possible that the company’s office is closed
due to strike or for some other reason resulting in the non-delivery of the
instrument of transfer, in time. It is not possible to foresee the several
factors which may cause the delay in the delivery of the instrument. In these
circumstances, the requirement of sub-section (1A)(b)(ii) has to be read
reasonably, so as to enable its smooth functioning; a delivery of an instrument
of transfer within a reasonable time should be held as a proper delivery. It is
only where the company opines that the instrument of transfer has become stale
and that it is improper to act upon it, the instrument of transfer has to be
held as liable to be ignored.
Nowhere the Companies Act declares that a duly
executed instrument of transfer ceases to be effective or becomes void after
the period referred to in sub-section (1A) of section 108. In fact, under
certain circumstances, those instruments can be acted upon by moving the
Central Government under sub-section (1D) of section 108. The reasonable mode
of understanding the scheme of section 108 will be, not to render delivery of
an instrument of transfer after the period specified in sub-section (1A) as
invalid, but as vesting a discretion in the company either to recognise the
transfer or not to recognise it depending upon the staleness of the instrument,
and even in the latter case, the affected person may move the Central
Government under sub-section (1D) by explaining the circumstances under which
the delay occurred and the hardship that results by the non-recognition of the
transfer. While understanding the scheme of section 108, the Court has to bear
in mind that trivialities would not render an act futile and technical
formalities required to be complied with for a valid transaction cannot
outweigh the importance to be given to the substance of the transaction.” (p.
586)
The said decision of the learned Judge was taken by way of appeal before the Division Bench of the Karnataka High Court in Mukundlal Manchanda v. Prakash Roadlines Ltd. [1995] 1 Comp. LJ 126. The Division Bench accepted the merits pleaded by the Prakash Roadlines and confirmed the conclusion of the Company Judge that the appellants-petitioners before him had not made out any case for grant of relief under the provisions. However, the Division Bench has not expressed its view, including the question whether section 108(1A) of the Act is mandatory in character. Inasmuch as they disposed of the appeal in the light of the factual details, particularly with reference to acquisition and waiver, they had not gone into the question whether sub-section (1A) is mandatory or directory.
21. The analysis of the above referred three
decisions would clearly show that in Mannalal Khetan’s case (supra), the
Supreme Court had considered only sub-section (1) of section 108 and no
decision was made with reference to sub-sections (1A), (1B), (1C) and (1D) of
section 108, since the subject-matter of transactions had taken place prior to
the coming into force of the Companies (Amendment) Act, 1965. Then we have left
with the judgments of Karnataka High Court, particularly the judgment of the
Single Judge in Mukundlal Machanda’s case (supra), wherein the learned Judge,
after referring to the judgment of the Supreme Court in Mannalal Khetan’s case
(supra), holding that the Supreme Court has no occasion to consider
sub-sections (1A), (1B), (1C) and (1D) and in the absence of any specific bar
as provided in sub-section (1) had concluded that sub-section (1A) is only
directory in nature. As rightly observed by the learned Judge, the requirement
of sub-section (1A)(b)(ii) has to be read reasonably, so as to enable its
smooth functioning, a delivery of instrument of transfer within a reasonable
time should be held as a proper delivery. We also agree with the conclusion
that only where the Company opines that the instrument of transfer has become
stale and that it is improper to act upon it, the instrument of transfer has to
be held as liable to be ignored. Further, as rightly pointed out by him, even
the belated delivery can be acted upon under certain circumstances while moving
Central Government under sub-section (1) of section 108. In the light of the
said provision, even though the discretion lies in the company either to
recognise the transfer or not to recognise it depending upon the staleness of
the instrument, as rightly observed by the learned Judge, the affected person
can very well move the Central Government under sub-section (1D) by explaining
the circumstances under which the delay occurred and the hardship that results
by the non-recognition of the transfer. We also agree with the conclusion that
in the light of the scheme of section 108, particularly after the insertion of
sub-sections (1A), (1B), (1C) and (1D), the Courts have to bear in mind the
trivialities would not render an act futile and technical formalities required
to be complied with for a valid transaction cannot outweigh the importance to
be given to the substance of the transaction. As said earlier, though the
matter was taken up by way of appeal before the Division Bench of the Karnataka
High Court, the Division Bench had not gone into the said aspect, namely,
whether mandatory or directory, however, confirmed the judgment of the Single Judge
on merits. In the light of the above discussion, more particularly in view of
the fact that in Mannalal Khetan’s case (supra), the Supreme Court has no
occasion to go into the inserted provisions, namely, sub-sections (1A), (1B),
(1C) and (1D) of section 108, in the absence of specific bar in sub-sections
(1A) and (1C) as found in sub section (1) of section 108, considering the
scheme of the said provisions, we are in agreement with the view expressed by
the learned Judge in Mukundlal Manchanda v. Prakash Roadlines Ltd. [1991] 72
Comp. Cas. 575 and we hold that except sub-section (1) of section 108, other
provisions, namely, sub-sections (1A) and (1C) are directory and not mandatory
in nature.
22. Now we shall consider the other aspects,
namely, the conduct of the Company, objection relating to maintainability of
the appeal, and the rights of pledger/pledgee. The materials furnished by the
petitioner would show that on 2-1-2001 all the share certificates with transfer
form were delivered. The total number of shares pledged were 25,92,800. Out of
this, it is not in dispute that 2,99,800 shares were transferred with the time
and the transfer forms were submitted belatedly. The transfer with regard to
the other shares has also been approved. The shares have only to be converted
into Demat form. This was made clear by letter dated 23-7-2003 and thereafter
several letters were written for completion of the transfer. The last letter
was of 19-9-2002. Subsequently, a legal notice was also issued on 29-7-2003.
All the details have been furnished in the form of typed set of papers before
this Court. As rightly pointed out by Mr. Arvind Datar, the Company never took
the plea that section 108(1C) had not been complied with. Not a single defect
has been specified. The learned Senior Counsel has also brought to our notice
that even in the counter filed before the Company Law Board, the plea of
section 108(1C) has not been raised.
23. Admittedly, the shares are owned by two
investment companies and one individual, namely (1) M/s. Dove Investments
Private Limited; (2) M/s. Maxworth Investment Private Limited; (3) P.N. Mohan,
former M.D. of the company. The abovesaid transferees have not objected to the
transfer. Even in the suits filed by the pledgers before the City Civil Court,
all the 3 plaintiffs have categorically admitted that they have no objection to
transfer all the shares. As rightly pointed out by Mr. Datar, the only
objection raised by them is with regard to the consideration of the share
transfer. On perusal of all the materials, we are satisfied that non-compliance
of section 108(1C) has not been raised at any stage. Further, even if the
objection with regard to non-compliance of section 108(1C) had been raised, it
is the claim of the petitioner that it would not immediately approach the
Central Government under section 108(1D) for extension of time.
24. The conduct of the company is also not
appreciable. They borrowed a sum of Rs. 5 crores and repaid only Rs. 2.5 lakhs.
It is the stand of the company that the loan would never have been given, but
for the pledge of the shares. It is not dispute that the petitioner is a State
Government Undertaking and the amounts advanced are public fund. As rightly
pointed out by Mr. Arvind Datar, the Company has raised frivolous technical
objection only to prevent the petitioner from realising its dues.
25. Learned Senior Counsel for the petitioner has
raised an objection that the above appeals are not maintainable under section
10F of the Act. He also contended that the appeals lie only on a question of
law arising out of the Company Law Board. He further contended that any
question which is neither pleaded nor dealt with by the Company Law Board will
not be considered by this Court under the appellate power. We are unable to accept
the said contention. Since this Court has entertained the appeals on satisfying
them and after formulating questions of law and the petitioner/contesting
respondent in the appeals put on notice regarding the same and both parties
were heard on the question of law, we are of the view that the above appeals
are maintainable under section 10F of the Act.
26. Though Mr. Alagiriswamy has contended that in
the light of the pendency of the suits, the petitioner is not entitled to any
relief at the hands of the Company Law Board, on going through the relief
prayed for, in the light of the contract/written agreement, particularly clause
8 and also of the fact that the company and their investors confirmed the right
in favour of the petitioner to get the shares transferred in their names, the
said contention is liable to be rejected and the decisions relied on on that
score are not helpful to their case.
27. In the light of the above discussions, we are
in agreement with the conclusion arrived at by the Company Law Board;
consequently, both the Appeals are liable to be dismissed as devoid of merits;
accordingly dismissed. No costs. Consequently, connected C.M.Ps., are closed.
[1990] 69 COMP. CAS. 164 (KER)
HIGH COURT OFKERALA
v.
Malabar and Pioneer Hosiery P.
Ltd.
V. SIVARAMAN NAIR AND P.K. SHAMSUDDIN JJ.
M.F.A. No. 534 of 1984.
APRIL 8, 1988
P.N.K. Achan
for the Petitioner.
C.M. Devan
for Respondent.
Sivaraman
Nair, J.—This is an appeal
filed under section 155(4) of the Companies Act, 1956, by the applicant in C.P.
No. 4 of 1983 (P.V. Chandran v. Malabar and Pioneer Hosiery P. Ltd. [1985] 57
Comp Cas 570) against the judgment of the learned company judge dismissing his
application which was filed under section 155(2) of the Act.
The first
respondent is a private limited company registered under the Companies Act,
1956. It has an authorised share capital of Rs. 5,00,000, divided into 5,000
shares of Rs. 100 each. 3,000 shares have been subscribed and paid up. The
second respondent was a shareholder having 705 shares. The controversy which
led to this appeal involves the transfer of those shares. The relevant facts
are as follows:
The appellant
purchased those 705 shares from the second respondent. By exhibit A-2 dated
November 10, 1983, the second respondent informed the first respondent about
the sale of her shares to the appellant. She requested that the transfer of
shares in the name of the appellant might be registered In exhibit A-3, dated
December 1, 1981, the first respondent-company rejected the said request
relying on article 33 of the articles of association of the company. It was
thereafter that the second respondent is alleged to have written exhibit A-4,
dated February 14, 1982, to the first respondent expressing her desire to
dispose of her shares in the company at the price of Rs. 100 fixed by the
company to a member or members of the company. Had this letter been received by
the company, it would have been in terms of clause 35 of the articles of
association; and if the company was not able, within three months thereof, to
find a member of the company to purchase the shares at the designated price, it
would have been obliged to permit the second respondent to sell her shares even
to an outsider in terms of clause 39 thereof. The second respondent claims to
have written exhibit A-13, letter dated July 29, 1982, informing the latter
that she had sold the shares to the appellant after due compliance with clause
39 of the articles of association, allegedly, since she did not receive any
response to her letter, exhibit A-4, within the specified period. In exhibit
A-6 letter dated November 15, 1982, the second respondent again wrote to the
first respondent to the effect that she had transferred her shares to the
appellant and had handed over to him the share transfer forms duly filled in.
On November 19, 1982, she wrote exhibit A-7 letter. That letter was delivered
to the company along with the share transfer forms and was duly acknowledged in
exhibit A-8. The company did not comply with the request of the appellant and
the second respondent. In exhibit A-9 letter dated December 24, 1982, the first
respondent-company informed the applicant that his application for transfer of
shares was rejected. No reasons were stated for rejecting the application. The
appellant, therefore, filed an application under section 155(2) of the
Companies Act, seeking rectification of the share register. He contended that
clause 40 of the articles of association enabling rejection of the application
for registration of transfer did not apply to the instant case. He, therefore,
sought a direction for rectification of the register of shareholders of the
company by substituting his name as the holder of 705 shares described in the
annexure to the petition in the place of the second respondent.
The first
respondent filed a detailed counter-affidavit alleging that exhibit A-2
communication dated November 10, 1981, was rejected by resolution of the board
of directors of the company in view of clause 33 of the articles of association
in exhibit A-3 letter (same as exhibit B-2). Exhibit A-4 dated February 14,
1982, (same as exhibit B-3) was received by the company only on September 24,
1982. The members of the company were informed by letter dated October 7, 1982,
of the offer of the second respondent to sell her shares at the rate of Rs.
100. Two members expressed their willingness to purchase the shares. One of
them was Shri Premkumar. On the allegation that the signature in his offer was
different from his other signatures on its records, the company requested Shri
Premkumar in its letter dated November 7, 1982, to confirm his offer. In
exhibit A-5 letter, the second respondent was informed that one shareholder was
interested in purchasing the shares. Exhibit A-6 dated November 15, 1982, and
exhibit A-7 dated November 19, 1982, were received by the company from the
second respondent requesting for transfer of her shares in the name of the
appellant. At its meeting held on February 18, 1982, the company resolved to
reject' the transfer application and the same was communicated to the appellant
and the second respondent in exhibit A-9 (same as exhibit B-8). The company
contended that the applicant had not sent the share certificates along with
exhibits A-6 and A-7. Nor did he remit Rs. 2 for registration of transfer as
required by clause 41 of the articles of association. Those requirements being
mandatory under section 108 of the Companies Act, read with clause 41 of the
articles of association, the applications were liable to be rejected. Clause 40
of the articles of association conferred an unfettered discretion on the
company to reject any application for transfer without stating any reason at
all. The company took up the position that, in an application for rectification
of the register of shareholders, this court could not interfere with the
discretion exercised by the company in terms of the articles of association,
nor could this court compel the company to disclose the reasons for rejection
of the application. The company maintained that it had not received any letter
dated February 14, 1982, or exhibit A-13 reminder alleged to have been sent on
July 29, 1982. The company also urged that the impugned decisions were taken in
good faith considering all material facts, and the interests of the company as
also its shareholders.
The appellant
examined himself as PW-1 and produced exhibits A-1 to A-13. The managing
director of the company was examined as RW-1. He produced exhibits B-1 to B-20.
The learned company judge referred to clauses 4, 33 to 36 and 39 to 41 of the
articles of association of the company and found that the company, being a
private limited company, was a closed corporation and the transfer of shares of
such a corporation was subject to the restrictions contained in the contract of
incorporation, viz., the articles of association. The learned company judge
also took the view that unless it was proved that the directors exercised the
power to reject the applications for transfer arbitrarily, or, in other words,
unless it be proved that they were acting oppressively, capriciously or
corruptly, or in some mala fide manner, the courts have no jurisdiction to
probe into the matter further. Reliance was placed on the decisions in Mathew
Michael v. Teekoy Rubbers (India) Ltd. [1983] 54 Comp Cas 88 (Ker) and Balwant
Transport Co. v. Y.H. Deshpande, AIR 1956 Nag 20. The learned company judge
also held that the conditions imposed and the formalities prescribed in the
articles of association of the company for transfer of shares read with section
108 of the Companies Act being mandatory, and those formalities not having been
fully complied with, the company was fully justified in rejecting the
application for transfer of shares. For this latter proposition, reliance was
placed on the decision of the Supreme Court in Mannalal Khetan v. Kedar Nath
Khetan [1977] 47 Comp Cas 185. The learned company judge also reviewed the
evidence and found that the appellant had not succeeded in making out that the
company exercised its discretion to reject the application for transfer without
stating reasons in an oppressive, capricious, whimsical or arbitrary manner, or
that the exercise of its powers was vitiated by mala fides. In that view, he
rejected the application for rectification of the register of shareholders of
the company. The appellant assails that decision.
Shri P.N.K.
Achan, counsel appearing for the appellant submitted that the findings of the
learned company judge on both the points are wrong and unsustainable. It is his
submission that the proposition that the company has unlimited discretion to
reject any application for transfer of shares without stating any reason at all
is unsustainable in view of the decision of this court in South Indian Bank
Ltd. v. Joseph Michael [ 1978] 48 Comp Cas 368. He also relied heavily on the
decisions in Bajaj Auto Ltd. v. N.K. Firodia [1971] 41 Comp Cas 1 (SC) and
Harinagar Sugar Mills Ltd. v. Shyam Sunder Jhunjhunwala [1961] 31 Comp Cas 387
(SC). Counsel submitted that the decision in Teekoy Rubbers' case [1983] 54
Comp Cas 88 (Ker) did not apply to the facts of the present case and was
wrongly relied on by the company judge.
Dealing with
the proposition that non-compliance with the formalities provided in the
articles of association and section 108 of the Companies Act were fatal and
justified the rejection of the application, counsel submitted that the position
is open to doubt. He submitted further that the facts sufficiently disclosed
that the second respondent had offered to sell her shares to any other member
of the company at a price reasonably fixed by the company and the disability of
the company to find a purchaser could not have resulted in refusal of her right
to transfer her shares. The company ought to have allowed the transfer in terms
of clause 30 of the articles of association. He contended further, that there
was no occasion for the company not to approve of the appellant who was an
established businessman of repute at Calicut, and the evidence of RW-1 did. not
disclose any circumstance adverse to the eligibility of the appellant to be a
member of the company.
These
arguments were strongly refuted by Shri C.M. Devan, counsel for the
respondents. He submitted that the principles laid down by the company judge in
Teekoy Rubbers' case [1983] 54 Comp Cas 88 (Ker) has been affirmed by a
Division Bench of this court in MFA No. 296 of 1981 [1990] 69 Comp Cas 145,
etc., and that governs the field as far as this court, is concerned in the
matter of discretion of the board of directors of the company to reject any
application for transfer without stating any reason at all. He submitted
further that the position must be far greater in favour of the private limited
company like the present one, because a private limited company is a closed
corporation and the board of directors have a larger discretion and greater
leeway in determining as to who shall be its constituents. He sought to rely on
the observations of the Supreme Court in Harinagar Sugar Mills case [1961] 31
Comp Cas 387 and Bajaj Auto's case [1971] 41 Comp Cas 1 in support of the
proposition that unless the unsuccessful applicant for transfer of shares makes
out that the company exercised its wide power of discretion in the matter of
enrolment of members, registration of transfers, etc., in an oppressive,
capricious or mala fide manner, or against the interests of the company, or the
shareholders, or the general public, the court shall not ordinarily interfere
with its internal administration. He relied very strongly on the decision of
the Supreme Court in Mannalal Khetan v. Kedar Nath Khetan [1977] 47 Comp Cas
185 to the effect that the negative mandate contained in section 108 of the
Companies Act, that "the company shall not register", was obligatory
and mandatory, and non-compliance with the procedural requirements of the
articles of association and the Companies Act was rightly held to be fatal to
the registrability of the transfer of shares. He also relied on Shri Gulabrai
Kalidas Naik v. Shri Laxmidas Lallubhai Patel of Baroda [1978] 48 Comp Cas 438
(Guj). Shri Devan urged that the dispute relating to the title to shares cannot
be determined in proceedings under section 155 of the Companies Act.
The learned
single judge has rested his decision on the first point mainly on Teekoy
Rubbers' case [1983] 54 Comp Cas 88 (Ker). Our learned brother M.P. Menon, J.,
had, in that decision, held, on a review of the English and Indian authorities
and with specific reference to Gulabrai Kalidas Naik [1978] 48 Comp Cas 438
(Guj), Harinagar Sugar Mills [1961] 31 Comp Cas 387 (SC), Bajaj Auto [1971] 41
Comp Cas 1 (SC) and South Indian Bank [1978] 48 Comp Cas 368 (Ker), that in
view of clause 24 of the articles of association of that company, which exactly
corresponds to clause 41 of exhibit A-l, the discretion of the directors to
reject applications for transfer of shares without giving reasons could not be
held to be an arbitrary exercise, unless the applicant showed positively that the
directors had acted corruptly, capriciously, arbitrarily, oppressively or mala
fide. A Division Bench consisting of one of us, (Sivaraman Nair J.) had
occasion to consider the same question in an appeal (see [1990] 69 Comp Cas
145) from that decision. After a detailed reference to decided cases, the
Division Bench affirmed the decision in Teekoy Rubbers [1983] 54 Comp Cas 88
(Ker) and held (at page 157 of 69 Comp Cas):
"a
closer scrutiny by the court could be attracted only if it was positively
proved that there had been no exercise of discretion but only an exercise of a
whim or caprice, or the decision of the directors was oppressive, capricious,
or mala fide or not in the interests of the company at all".
We do not
find any circumstance as pleaded, proved or argued in this case which should
persuade us to take a different view in this case on the scope and amplitude of
the discretion of the company to refuse to register a transfer of shares
without disclosing reasons. We are, therefore, inclined to affirm the finding
of the learned company judge on the point of law that the court has only very
limited jurisdiction under section 155(2) or (4) of the Companies Act to
interfere with the discretion exercised by the board of directors to reject an
application for transfer without stating any reason at all. If the board of
directors specified reasons for rejecting the application for registration of
transfer of shares notwithstanding their right not to do so, such reasons may
be open to scrutiny. In such an event, the court may scrutinise the reasons and
interfere with the decision of the board of directors as happened in South
Indian Bank [1978] 48 Comp Cas 368 (Ker). The only exception to this rule, as
we understand it from decided cases, is when the applicant proves, by positive
evidence of an affirmative character, that the board of directors exercised the
discretion corruptly or oppressively or capriciously or arbitrarily or in bad
faith, or that such act was against the interests of the company or its shareholders
or the general public. We find that the appellant was not able to discharge
this rather heavy burden. True it is that the burden is onerous, but it shall
be so if we accept the basic postulate that a corporation is entitled
ordinarily to order its affairs in as best a manner as its constituents deem
fit. This is more particularly so in this case, since the company concerned is
a private limited company.
Section 108
of the Companies Act deals with transfer of shares and debentures. That section
reads:
"108.
Transfer not to be registered except on production of instrument of transfer.
—(1) A company shall not register a transfer of shares in, or debentures of the
company, unless a proper instrument of transfer duly stamped and executed by or
on behalf of the transferor and by or on behalf of the transferee and
specifying the name, address and occupation, if any, of the transferee, has
been delivered to the company along with the certificate relating to the shares
or debentures, or if no such certificate is in existence, along with the letter
of allotment of the shares or debentures:
Provided that
where, on an application in writing made to the company by the transferee and
bearing the stamp required for an instrument of transfer, it is proved to the
satisfaction of the board of directors that the instrument of transfer signed
by or on behalf of the transferor and by or on behalf of the transferee has
been lost, the company may register the transfer on such terms as to indemnity
as the board may think fit:
Provided
further that nothing in this section shall prejudice any power of the company
to register as shareholder or debenture-holder any person to whom the right to
any shares in, or debentures of, the company has been transmitted by operation
of law.
(1A) Every
instrument of transfer of shares shall be in such form as may be prescribed,
and —
(a) every such form shall, before it is signed by
or on behalf of the transferor and before any entry is made therein, be
presented to the prescribed authority, being a person already in the service of
the Government, who shall stamp or otherwise endorse thereon the date on which
it is so presented, and
(b) every instrument of transfer in the
prescribed form with the date of such presentation stamped or otherwise endorsed
thereon shall, after it is executed by or on behalf of the transferor and the
transferee and completed in all other respects, be delivered to the company, —
(i) in the case of shares dealt in or
quoted on a recognised stock exchange, at any time before the date on which the
register of members is closed, in accordance with law, for the first time after
the date of the presentation of the prescribed form to the prescribed authority
under clause (a) or within two months from the date of such presentation,
whichever is later;
(ii) in
any other case, within two months from the date of such presentation".
The appellant
has no case that this provision does not apply to the facts of the present case.
Clauses 33 to 40 of exhibit A-1 articles of association of the company deal
with transfer of shares and provide that no shareholder shall transfer,
mortgage or otherwise create any interest in the share of the company without
the consent of the majority of the directors, and only in favour of one or more
members of the company, that no share shall be transferred except to a member
if one is willing, that the transferor shall give notice of his intention to
sell the share, that if the board of directors, within three months after
receipt of such notice, finds a person to purchase the share at the fair market
value, the transferor shall sell his shares to such member and that if the
board of directors do not find a suitable purchaser among the members, it shall
be open for the member, after the period above mentioned, to transfer the
shares to any person at any price and the company shall enter the name of such
transferee in the register of the company. Clause 40 confers an absolute
discretion on the board of directors. That provision is in the following terms:
"The
directors may, at their own absolute and uncontrolled discretion, decline to
register any transfer of shares by a shareholder who is indebted to the company
or upon whose shares the company have a lien or otherwise, or any transfer to
any person not approved by them, and in no case shall a shareholder or proposed
transferee be entitled to require the directors to state the reason for the
refusal to register, but their refusal shall be absolute, and shall not be
liable to be questioned".
We have
discussed the effect of the aforementioned provisions in the previous
paragraphs. We reiterate, in the light of decided cases, that the company
cannot be compelled to disclose the reasons for refusal to register unless the
applicants prove positively that the company exercised that discretion
oppressively or capriciously or against the interests of the company or the
shareholders or the general public. The appellant had not led any such
evidence. On the other hand, the evidence led by the company has made out
sufficiently clear that the board of directors acted in good faith in
accordance with the articles of association and in the interests of the company
in dealing with and disposing of the application. We should add that the
impression which we gather, on a reading of the evidence of PW-1, is that the
appellant wanted somehow to get into the company. The reliance placed on
exhibit A-4 and exhibit A-7 dated February 11, 1982, and September 29, 1982,
respectively, the former of which was delivered to the company only on
September 24, 1982, whereas the latter was not received at all, only indicates
an anxiety to create evidence artificially to claim that there was due
compliance with clause 39 of the articles of association. The fact that soon
after receipt of exhibit A-4 (same as exhibit B-3), the company acted promptly
and that act elicited two offers from members proves the bona fides of the
respondent. RW-1 was positive in his evidence that a letter of one of the
members, Sri. Balakrishnan Nair, exhibit B-l, was brought to him by PW-1
himself. This indicates the dogged persistence of the appellant to get into the
company by means fair or foul. In this state of the evidence, we are of the
opinion that the learned single judge was fully justified in holding that the
appellant was not able to make out any case for interference with the
discretion of the directors.
Clause 41 provides for the formalities to be complied
with in filing an application for transfer. That provision reads:
"Every instrument of transfer shall be in
writing and signed by the transferor and transferee and in the case of share
held by two or more joint holders, or to be transferred to the joint names of
two or more transferees by all such joint holders, or by all such transferees
as the case may be and must be left at the office of the company to be
registered, accompanied by the certificate for the shares to be transferred and
by such evidence as the directors may reasonably require to prove the title of
the transferor, and a fee of two rupees or such other sum as the directors
shall from time to time determine must be paid to the company for the
registration of every such transfer, and upon payment thereof the directors
subject to the powers vested in them by article 40 shall register the
transferee as a shareholder and retain the instrument of transfer, but the
transferor or the transferors, as the case may be, shall be deemed to remain
the holder or holders of such share until the name or names of the transferees
is or are entered in the register of members in respect thereof".
It is clear from clause 41 of the articles of
association that strict compliance with the procedural requirements is
absolutely essential. Section 108 of the Act enjoins upon the company to reject
any application for transfer of shares, unless the procedural requirements are
fully complied with. That there has been non-compliance with the requirements
is not very much in dispute in this case. What counsel for the appellant urges
is that such non-compliance was inconsequential. The definite case of the
respondent-company was that the appellant had not sent the share certificate
which was sought to be transferred along with exhibit A-7 letter dated November
19, 1982. Nor did the applicant remit Rs. 2 to the company for transfer as
enjoined by clause 41 of the articles of association. Counsel submits that
these requirements were made good soon thereafter when exhibit A-8 dated
November 20, 1982, a formal request from the shareholder and the applicant
along with the share transfer form which was duly filled up and stamped was
forwarded to the company. The submission which the appellant makes is that the
procedural requirements of transfer of shares are, in the very nature of things,
only directory and not obligatory; and therefore, the application was not
liable to be rejected if there was substantial compliance with the
requirements.
We have seen from the decision of the Supreme Court
in Mannalal Khetan v. Kedar Nath Khetan [1977] 47 Comp Cas 185, that the
negative, prohibitory, and exclusive words are indicative of a legislative
intent that the statute is mandatory. Negative words are clearly prohibitory
and are ordinarily used as a legislative device to make a statutory provision
imperative. The words "shall not register" are mandatory in
character. The mandatory character is
strengthened by the negative form of the language. It cannot be said that the
provisions contained in section 108 are directory because non-compliance with
the section is not declared an offence. Section 629 A of the Act prescribes the
penalty where no specific penalty is provided elsewhere in the Act. It is a
question of construction in each case as to whether the Legislature intended to
prohibit the doing of the act altogether, or merely to make the person who did
it liable to pay the penalty. The provisions contained in section 108 are
mandatory. This being the legal position as declared by the Supreme Court of
India, we have no hesitation in holding that the learned company judge was
right in holding that the application for transfer was liable to be rejected
due to non-compliance with the procedural formalities and in view of the
provisions contained in section 108 of the Companies Act, 1956.
There was
some considerable argument as to whether the evidence disclosed the
unsuitability of the applicant to be registered as a transferee of the shares.
We must frankly state that it is not the concern of this court, either on the
original side or on the appellate side, to assume what would have been the
reasons which prompted the refusal to register the transfer, and then to find
out whether those reasons were good or bad. Article 40 of the articles of
association confers an unfettered discretion on the board of directors of the
company not to state any reason at all for rejecting an application for
transfer. That clause, which forms part of the contract of incorporation
specifically provides that:
"In no
case shall a shareholder or proposed transferee be entitled to require the
directors to state the reason for the refusal to register, but their refusal
shall be absolute, and shall not be liable to be questioned".
If no member
is entitled to insist that the company shall state reasons for refusal to
transfer, and such refusal shall be absolute and not liable to be questioned,
we cannot hold that an outsider who wants to become a member of the company
must be in a better position. The imperatives of clause 40 apply not only to
the members but also to a proposed transferee. We are, therefore, not in a
position to accede to the submission that clause 40 binds only a member of the
company and not a proposed transferee. What, he offers and proposes is to be a
member of the company in terms of the contract of its incorporation and not in
defiance thereof.
It may be
true that the board of directors may state reasons in spite of the absolute and
uncontrolled discretion to decline to register a transfer without stating any
reason at all. It may also be seen as was held in Harinagar Sugar Mills [1961]
31 Comp Cas 387 (SC), Bajaj Auto [1971] 41 Comp Cas 1 (SC) and South Indian
Bank [1978] 48 Comp Cas 368 (Ker) that such reasons are open to scrutiny at
least to a limited extent by courts. The two former cases made out a clear case
of oppression of minority shareholders and all the three cases dealt with a
wrangle by warring groups to take over control of the company by any means.
But, no court has so far said that except in cases where the applicant proves
that the board of directors was actuated by corrupt, oppressive, capricious,
arbitrary or mala fide motives in declining the application, the court shall
compel the board of directors to disclose the reasons, scrutinise the same and
then find such reasons to be improper.
A few glaring
facts which even otherwise justify the finding on merits are discernible from
the evidence in this case. Exhibit A-2 application for transfer was made on
November 10, 1981, without compliance with clauses 33 to 39 of the articles of
association of the respondent-company. The board of directors duly considered
the application and rejected the same in exhibit A-3 dated December 1, 1981.
The second respondent is alleged to have issued exhibit A-4 notice dated
February 14, 1982, of intention to transfer the shares, as enjoined by clause
35 of exhibit A-1 articles of association to transfer the shares at the rate of
Rs. 100 per share. RW-1 was positive in his evidence that exhibit A-4 dated
February 14, 1982, was received by him only on September 24, 1982. This is
evident from exhibit B-3 the original of exhibit A-4 on which RW-1 entered a
note and initialled on that day. It is also evident that the proposal was
placed before the board of directors immediately thereafter, and the company
circulated to all shareholders a proposal by the second respondent to transfer
her shares. Two members, one Shri Balakrishnan Nair and another Shri Premkumar
wrote back to the company in exhibits B-10 and B-15 letters signifying their
acceptance of the offer. RW-1 has deposed that PW-1, father of the applicant,
was contacting the above two members and had brought exhibit B-11 communication
from Mr. Balakrishnan Nair, withdrawing his offer. In reply to exhibit B-16
letter dated November 11, 1982, Shri Premkumar wrote exhibit B-17 dated
December 7, 1982, affirming his offer. The company also received exhibit B-9
lawyer notice on behalf of Shri Premkumar protesting against the proposed
rejection of the offer made by Shri Premkumar. The company also received
exhibit B-18, letter dated December 7, 1982, from Shri Pachayyappan, father of
Shri Premkumar, questioning the rejection of Shri Premkumar's offer to purchase
the shares. Shri Pachayyappan was a member of the company. His letter was dated
December 7, 1982. The difference in the signature of Shri Premkumar was pointed
out again to his father Pachayyappan and his counsel Shri C. Achutha Menon.
Copy of that letter was also sent to the Registrar of Companies. It was in the
meantime that the company sent exhibit B-14 (exhibit A-6) letter dated November
11, 1982, to the second respondent to the effect that no shareholder is
available to purchase her shares. RW-1 states that it was on the same date that
he wrote exhibit B-16 to Shri Premkumar to confirm his address, so as to pursue
his offer further. The company then received exhibit A-7 letter dated November
15, 1982, to the effect that since there was no response to the notice exhibit
B-14 dated January 24, 1983, he had transferred his shares to the applicant. It
is very significant that exhibit A-4 notice said to be dated February 14, 1982,
was received by the company only on April 29, 1982. This categoric assertion of
RW-1 was not shaken in spite of a detailed cross-examination. Nor was the
petitioner able to make any headway regarding the assertion of RW-1 that he had
not received any reminder dated July 29, 1982. If that be the position, the
company received notice from the second respondent under clause 35 of the
articles of association only on September 24, 1982. The period of three months
within which the board of directors ought to have mentioned the names of the
members of the company who were willing to accept the offer would have expired
only on December 23, 1982. The company had, in the meantime, received two
offers, one from Shri Balakrishnan Nair and the other from Shri Premkumar.
Withdrawal of the acceptance of the offer made by Balakrishnan Nair was taken
to the company by PW-1 himself. The other offer of Shri Premkumar could not
have been, nor was it, actually rejected. The company was in the process of
ascertaining the genuineness of his offer. The respondent need, however, have
responded to exhibit A-4/B-3, which it received only on September 24, 1982,
within three months thereafter. It is significant to note that the company
would have taken action but for the letter of the Registrar of Companies to
withhold any further action in the. matter. On a scrutiny of such evidence, we
are of the opinion that the applicant and his father, PW-1, were adopting all
means to see that somehow or other the shares were transferred in the name of
the applicant-appellant. It is in evidence that RW-1 knew the applicant and his
father, RW-1, fairly well. The appellant had gone to the extent of suggesting
to RW-1 whether PW-1 was not a close friend of the brother of RW-1. They
belonged to the same town and they knew each other. In these circumstances, if
a private limited company, which is a closed corporation with only 3,000
shares, decided not to entertain, or admit the applicant—who was known to the
company and its constituents—as a member, we cannot find that such decision to
decline admission to the applicant was improper or capricious or arbitrary or
oppressive. The decision was apparently due to the compulsions of the articles
of association to the effect that if another member offered to purchase the
shares which were available for transfer, such member shall have priority over
an outsider. The anxiety of the company to prefer a member, and not an outsider
to hold the shares cannot be considered as unreasonable or arbitrary.
We are,
therefore, of the opinion that even on merits, the evidence available before
the learned company judge was such that it fully justified the
conclusion that the company was not actuated by any improper or mala fide
motive in declining to register the transfer of shares in favour of the
applicant. The company had its own reasons for not approving the appellant to
be a constituent of the company. It is not liable to be compelled to disclose
its reasons. Unless vitiating circumstances are specifically pleaded and
positively proved, we shall assume that the reasons were good or at least that
they were not bad. The court shall not look any further. The company,
particularly a private limited company, should know better as to how to order
its affairs. The court steps in only if it acts oppressively or capriciously or
mala fide or against the interests of the company or its shareholders or the
general public. The interests of a stranger-applicant for purchase of shares do
not fall into any of those categories, in the proved facts of this case.
We, therefore, dismiss this appeal, but, in the circumstances of the case, without any order as to costs.
[1988] 64 COMP. CAS. 497 (
HIGH COURT OF
v.
Wearwell Cycle Co. (
CIVIL APPEAL NOS. 26, 414, 699, 844, 855, 949, 963 OF 1985,
63, 1818 OF 1986, 94, 158, 279, 281 AND 300 OF 1987
MAY 20, 1987
JUDGMENT
D.
P Wadhwa, J.—The
company, Wearwell Cycle Co. (India) Ltd., was ordered to be wound up on March
9, 1978 (OP No. 54 of 1977), on a creditor's petition. In fact, the company
supported the winding up petition. The amount of debt was Rs. 1O,53O 89. The
company did not file any reply to the petition, but in the reply to an
application seeking interim orders (CANo. 362 of 1977), the company admitted
that it was unable to pay its debts. The petitioning creditor had alleged that
there were numerous creditors of the company
who were not paid and that the company was doing no business for want of funds
and loss of credibility. It was stated that the company was not complying with
the provisions of the Companies Act, 1956 (for short "the Act"), and
there were allegations of mismanagement by the directors of the company. It was
also stated that it appeared that on getting wind of the intention of the
creditors to file a winding up petition and other applications for preservation
of the assets of the company, the company "transferred its valuable
tenancy rights in its Connaught Place office to a third party on receipt of
huge underhand payment with a view to defraud its creditors". In the reply
mentioned above, the company detailed the circumstances and the efforts put in
by the directors to revive the company and put it back on its feet. It referred
to the liability to the Punjab National Bank and also to a writ petition (CW
No. 834 of 1973), which was decided by this court and a direction issued to the
Central Government to transfer the land and building to the company for certain
amount. This judgment is dated August 28, 1974. The company stated that it
would have certainly "turned the corner "if this property had been
transferred to the company, but the Union of India had filed an appeal (LPA No.
109 of 1974) and there was stay of the operation of the judgment dated August
28, 1974. The company said that in spite of its efforts to have the Letters
Patent Appeal decided at an early date, it was unsuccessful. It was mentioned
that the company suffered a loss of Rs. 2,38,400 53 in the year 1973-74 and
accumulated losses rose up to Rs. 27,86,687 91 as against paid-up capital of
Rs. 18,62,970. It was also mentioned that the directors, their friends and
relatives had themselves given a loan of over Rs. 3 75 lakhs to the company and
were not able to get back the same and further that the bankers were not ready
to extend any further loan to the company and that power in the factory had
been disconnected on account of non-payment of electric bills. It was then
stated that there were several statutory liabilities which remained
unsatisfied. Certain blame was also laid on the old management of the company.
It was mentioned that the Government had also been approached to take over the
company as a sick unit and various other industrialists were also contacted for
the purpose. The company did not pay any remuneration to the directors for the
last over 16 years and no one was prepared to become a director and there had
been no secretary, because the company could not afford any good salary. One of
the directors died in December, 1977, and another director resigned. The
company was left only with one director who alone constituted the board of
directors. It was stated that since there was no sale at all from the showroom
of the company in New Delhi for a period of about 8 months in 1973, the tenancy
rights were surrendered to the landlord in December, 1973, "who did not
pursue his legal case and also condoned recovery of the rent". On these
averments, it was stated that "the respondent company supports the prayer
of the petitioner in the application for appointment of provisional liquidator
for the purpose of winding up the respondent company". This reply of the
company is dated January 5, 1978. Along with the reply, a copy of the resolution
of the board of the company dated December 31, 1977, was filed. This resolution
reads as under:
"The board approved
with regret that the company may support the winding up petition filed by M/s
Lalit Trading Company, as it is unable to run the business any more, due to
extreme financial difficulties. Further, the board authorised Shri H. L. Seth
to state full difficulties to the court including the maximum sacrifices
suffered by him and the present management in running the unit for over 11
years".
On the date this resolution
was passed, the Punjab National Bank instituted a suit in this court against
the company and the guarantors for recovery of about Rs. 25 lakhs with future
interest. This is Suit No. 109 of 1979. There were in all 9 defendants.
Defendants Nos. 2 and 3 are respectively H. L. Seth and R. K. Seth. It will be
appropriate to set out the reliefs only to understand the nature of the suit.
These are:
"It is, therefore,
respectfully prayed that this hon'ble court may be pleased to award/grant to
the plaintiff:
(a) a preliminary decree in terms of Order 34, rule 4, against
defendant No. 1 (being principal debtor) and defendants Nos. 2 and 3 (being
guarantors) jointly and severally for Rs. 24,87,547 95 plus further interest as
claimed in para 22 above;
(b) a preliminary decree against defendant No. 1 (being principal
debtor) and defendants Nos. 4 to 8 (being guarantors of the old accounts Nos.
313 and 315) jointly and severally for Rs. 21,90,171 33 (which is the debit
balance in the old accounts) plus further interest as claimed in para 22 above;
(c) in case of failure of the defendants to pay the amount of
preliminary decree, then a final decree in terms of Order 34, rule 5, for the
sale of the mortgaged/pledged/hypothecated properties. Directions be also given
as to the payment out of the sale proceeds to the plaintiff bank the amounts
decreed in its favour keeping in view the respective guarantees and the extent
of the liability assumed by respective guarantors;
(d) costs of the
suit; and
(e) such other relief in addition to and/or in substitution of the
relief prayed for above, to which the plaintiff may be found entitled, inter
alia, to make the relief to the plaintiff complete and effective".
This suit was ultimately
settled and the order dated October 31, 1986, deciding the suit is as under:
"In this suit for
recovery of Rs. 24,87,547 95, filed under Order XXXIV of the Code of Civil
Procedure by the plaintiff-bank, the parties have arrived at a compromise and
in pursuance thereof a sum of Rs. 19 18 lakhs has been received by the
plaintiff-bank from the guarantors/defendants and in view thereof learned
counsel for the plaintiff has come forward with a statement that the suit may
be filed as satisfied. Accordingly, the suit is filed as satisfied. The
guarantors are released from their liability and the documents of title which
are with the bank or have been filed by the bank in the court would be returned
by the bank to the party entitled. The parties would bear their own
costs".
This was on the statement
of counsel for the Punjab National Bank, the plaintiff that a sum of Rs. 19.18
lakhs had been received by the bank from the guarantors towards full and final
settlement of the claim of the plaintiff in the suit and as such the suit might
be filed as satisfied and that the guarantors might be released from their
liability and the documents might be returned to them. As to who in fact made
this payment of 1918 lakhs and the circumstances in which this payment was made
and as to the effect of the aforesaid order directing the suit to be filed as
satisfied, I will have to refer in detail at a later stage.
On September 14, 1983, H.
L. Seth ("Seth "for short) filed an application (CA No. 527 of 1983)
under section 391 of the Act and sought directions to convene separate meetings
of the unsecured creditors and of the equity and preference shareholders of the
company for the purpose of considering and/or approving with or without
modification a scheme of arrangement proposed to be made between the company and
the unsecured creditors and the contributories of the company. Punjab National
Bank, being a secured creditor, was outside the proposed scheme of compromise
or arrangement. This application was filed through Mr. R. K. Talwar, advocate
for Seth. It was mentioned that the authorised capital of the company was Rs.
50 lakhs divided into 40,000 equity shares of Rs. 100 each and 10,000 10%
cumulative preference shares of Rs. 100 each, and further that the issued
capital of the company was Rs. 30,91,900 consisting of 10,000 10% cumulative
preference shares of Rs. 100 each and 20,919 equity shares of Rs. 100 each. It
was further stated that the issued, called and paid-up capital of the company
was Rs. 18,62,900
consisting of 3,527 10% cumulative preference shares of Rs. 100 each and 14,802
equity shares of Rs. 100 each and that the calls in arrears were Rs. 2,575. An
amount of Rs. 32,645 on account of preference shares was stated to have been
forfeited by the company. The application mentioned that the secured loans were
to the tune of Rs. 15,85,401 95, unsecured loans—Rs. 4,61,269 14 and current
liabilities— Rs. 8,23,085.96 The applicant was a former managing director of
the company and as propounder of the scheme stated that he and members of his
family, relations, friends, etc., held about 70% of the issued, subscribed and
paid-up capital of the company. It was mentioned that a "financier
"had agreed to associate himself with the applicant and provide necessary
funds for the implementation of the scheme and also provide working capital for
the company. Reference was made to a letter dated May 6, 1981, of Punjab
National Bank that the bank was prepared to settle its claim of Rs. 25 lakhs
for Rs. 14 lakhs only. It was also mentioned that though the bank claimed to be
a secured creditor, it was not in fact a secured creditor because its charges
had not been registered. It was mentioned that, under the scheme, it was
proposed that the bank should be paid the amount like any other unsecured
creditor of the company who would be paid 50% of the amount due and payable by
the company to the creditors. The scheme envisaged payment of 20% of the amount
paid up on equity shares and at the rate of 30% on the preference shares and no
arrears of dividend were to be payable on the preference shares. It was stated
that the rehabilitation of the company which was a sick industrial undertaking
was not only in the interest of the creditors and contributories but was also
greatly in public interest. The proposed scheme of arrangement with the
shareholders and creditors was stated to be beneficial to the shareholders and
the creditors. Reference in the application was also made to the writ petition
(CW No. 834 of 1973) and pendency of the Letters Patent Appeal (LPA No. 109 of
1974) against the order dated August 28, 1974, allowing the writ petition. It
was mentioned that by an order of the appellate Bench, the order of the single
judge had been stayed till the disposal of the appeal and that the appeal was
ready for hearing. It is not necessary to refer in detail to the proposed
scheme of arrangement and it is enough if reference is made to the order of
March 15,1984, of D. R. Khanna J. It was mentioned in this order that it was
stated from the side of Seth that he was still assessing the viability of the
scheme and that in case the liabilities of the company exceeded a particular
limit, he might be interested in pursuing his scheme and if these liabilities
were beyond that limit, he might have to drop the scheme. The court observed
that it was strange that this stand was being taken after having moved the
scheme but that the position should have been
assessed earlier, and that the applicant should not have rushed to the court
with the scheme without ascertaining what matters of the company he had to
tackle. In the order dated May 21, 1984, it was observed that the official
liquidator as well as the Central Government had pointed out that the scheme
was ex facie highly vague and generalised and did not bring out detailed
particulars. The company owned an industrial plot of land measuring over 55,000
sq. yards and building sheds at Faridabad for the establishment of a factory
which had been allotted to the company by the Government of India, Ministry of
Rehabilitation. The entire machinery of the company for manufacture of cycles
was stated to be lying idle. It was stated that the value of the land had
substantially increased in the meanwhile. The court did not order holding of
meetings of the creditors and shareholders as it was not satisfied prima facie
about the viability of the scheme. The propounder was directed to come out with
clear figures as to what were the liabilities, both secured and unsecured, and
also as to what were the existing assets of the company. A direction was also
issued that the scheme should mention as to what were the investments to be
made and the offer, if any, of financial assistance, should be placed on
record. It was also mentioned that that apart, the propounder must come out
with a time schedule within which the scheme was intended to be implemented and
that it should not be made dependent upon the court or any third party deciding
certain matters. Thereafter, the propounder sought time after time. Ultimately,
by order dated January 15, 1985, it was observed that a fresh application under
section 391 of the Act (CA No. 26 of 1985) had been made and that the present
application (CA No. 527 of 1983) had, therefore, become infructuous and was
disposed of as such. The record of the application was, however, directed to be
retained for the purpose of reference.
Seth, in the meanwhile, had
entered into an agreement on November 28, 1984, with A. K. Misra and Braham
Arneja which was with reference to the scheme of arrangement propounded by Seth
and was the subject-matter of CA No. 527 of 1983. Under this agreement, Seth
approached Misra and Arneja to take over the entire project of the company for
its revival/reconstruction. The agreement stated that Seth and his group held
75% of equity shareholding (numbering 13,000 shares) in the company and 2,100
preference shares. Details of the shareholdings were annexed with the
agreement. Misra and Arneja were to buy equity shares of the face value of Rs.
100 each at the rate of Rs. 20 per share and they were also to buy 2,000
preference shares of Rs. 100 each at the rate of Rs. 30 per such share. The
total price thus payable for 13,000 equity shares and 2,000 preference shares
was Rs. 3,20,000. Seth agreed to transfer these shares to Misra and Arneja for
the aforesaid consideration. This payment was agreed to be made in three
amounts of Rs. 51,000, Rs. 30,000 and Rs. 2,39,000. Rs. 51,000 was paid by
Misra and Arneja on the signing of the agreement by means of a cheque. A cheque
for Rs. 30,000 was issued in favour of one P. N. Seth and that was to be
encashed only on no objection by the High Court regarding transfer of shares.
The amount of Rs. 2,39,000 was to be paid immediately on approval of the
scheme. Various account payee cheques totalling this amount were issued in
favour of various transferors of shares with the condition that these cheques
would be encashed only on the scheme being approved by the High Court and
shares transferred in the names of Misra and Arneja and/ or their nominees and
the factory premises of the company being handed over to Misra and Arneja.
Under another term of the agreement, Misra and Arneja also agreed to buy
credits amounting to Rs. 4,88,996 24 standing in the names of various persons
in the company on paying Rs. 2,44,498 12, being 50% of the value of the credits.
The names of the creditors/depositors were also annexed to the agreement.
Again, payment was to be made on approval of the scheme, etc., by the High
Court. There was yet another term in the agreement under which it was stated
that the Punjab National Bank was a creditor of the company to the extent of
Rs. 24,87,537 and that as per letter dated May 6, 1981, of the bank, it had
agreed to accept an amount of Rs. 14 lakhs in full and final settlement of its
claim against the company. Seth assured that though a period of 3 years had
elapsed from the date of the letter, yet the bank would accept Rs. 14 lakhs in
full and final settlement of all its dues from the company. It was stipulated
that this was a vital assurance given by Seth and he would see that the bank
gave a valid discharge of all the liabilities of the company on payment of Rs.
14 lakhs and released all its assets and guarantees, etc. Misra and Arneja
undertook to pay Rs. 14 lakhs to the bank within a reasonable time on the
sanction of the scheme by the High Court and possession of the factory premises
handed over tp them. The fourth term in the agreement related to a liability
amounting to Rs. 6,27,082 due to other creditors of the company which was
agreed to be met by Misra and Arneja under the terms of the scheme of
arrangement pending in the court in CA No. 527 of 1983. Again, under this
agreement, Misra and Arneja were to prosecute the appeal through the official
liquidator filed by the Union of India (LPA No. 109 of 1974) and they were to meet
all the expenses incurred in that regard.
In spite of the fact that
the scheme of arrangement proposed in CA No. 527 of 1983 fell through, yet the
parties acted on the agreement and, as noted above, in fact filed another
scheme of arrangement for revival of the company by CA No. 26 of 1985 filed on
January 11, 1985.
Under this agreement and
pending approval of the scheme in CA No. 26 of 1985, Misra and Arneja claimed
to have paid a sum of Rs. 39,87,57000, and this has not been disputed. This
amount is stated to have been paid as under:
(1) Rs. 51,000 paid to Seth on November 28, 1984, on the
execution of the agreement on account of purchase of shares.
(2) Rs. 2,69,000 paid to Seth on February 11, 1985, being the
balance amount payable under the aforesaid agreement for the purchase of 13,000
equity shares and 2,000 preference shares.
(3) Rs. 2,44,498 12 again paid to Seth on February 11, 1985,
on account of assignment of credits/deposits as mentioned in the agreement.
(4) Rs. 19,18,000 paid to Punjab National Bank in the sums of
Rs. 14,00,000 on August 1, 1985, and Rs. 1,00,000 on August 10, 1985, and Rs.
4,18,000 on May 8, 1986.
(5) Rs. 16,36,707 78 deposited with the Registry of the High
Court being price for transfer of land and building to the company through the
official liquidator by the Central Government as per judgment of the High Court
dated January 15, 1985, in LPA No. 109 of 1974. This amount was deposited in
the sums of Rs. 12,00,000 on May 24, 1985, and Rs. 4,36,707 78 on September 30,
1985.
(6) Rs. 68,365 paid to the official liquidator on February
20, 1987, for purchase of non-judicial stamp papers for execution of sale deed
by the Central Government in favour of the company.
By judgment dated January
15, 1985, in LPA No. 109 of 1974, the appeal of the Union of India was
dismissed and the Union of India was directed to transfer to the company
property bearing No. 30, New Industrial Township, Faridabad, comprising of land
and factory sheds constructed thereon subject to the company paying a sum of
Rs. 4,71,080 along with arrears of rent and interest up to date. There was a
dispute regarding the claim of interest by the Union of India and an
application, being CM No. 721 of 1985, was filed in LPA No. 109 of 1974 seeking
certain clarifications. By order dated May 17, 1985, the court directed deposit
of Rs. 12,00,000 on or before May 31, 1985, which amount, as noted above, was
deposited by Misra and Arneja. Ultimately, the dispute was resolved and a
further amount of Rs. 2,36,707 78 was deposited on September 30, 1985, by Misra
and Arneja. Under orders of the court, the whole of the amount of Rs. 14,36,707
78 was ordered to be given by the registry by making a cheque in the name of
Tahsildar (Sales), Faridabad. The sale deed of the property was ultimately
executed in favour of the company in liquidation on March 3, 1987.
Though under the agreement
dated November 28, 1984, Seth had assured that Punjab National Bank would
settle its claim for Rs. 14 lakhs, yet Misra and Arneja had to pay Rs. 19,18,000
to the bank. Both H. L. Seth and P. N. Seth, defendants Nos. 2 and 3,
respectively, in the suit filed by the Punjab National Bank, had created
equitable mortgages of their properties situated at Karol Bagh, New Delhi. They
had also executed blank transfer deeds in respect of their equity shareholdings
pledging their shares in favour of the bank. All these documents of title,
share certificates and transfer deeds were returned to them on the decision of
the suit and they were discharged of all their liabilities towards the bank.
Under the agreement dated
November 28, 1984, Seth had handed over to Misra and Arneja requisite transfer
deeds regarding transfer of the shares along with some share certificates. As
regards other share certificates not handed over, it was stated that these had
been lost. All these transfer deeds and share certificates have been filed in
the proceedings before me.
It will be seen that till
now Misra and Arneja had neither been the shareholders nor the creditors of the
company. It is not that they had been depositing or paying various amounts or
prosecuting the appeal (LPA No. 109 of 1974) on their own. There have been
specific orders of the court and they have been actively participating in these
proceedings. In some of the applications filed by Misra and Arneja, Seth
supported them. At some later stage, however, Seth tried to repudiate the
agreement dated November 28, 1984, and even questioned the locus standi of
Misra and Arneja in these proceedings. This happened, as it appears to me, as
Kelvinator of India Ltd. also jumped into the fray coming up with its own
scheme for revival of the company and in that it was joined by one of the
shareholders of the company. The terms offered by Kelvinator of India Ltd.,
being more lucrative to both shareholders and depositors/creditors of the
company made Misra and Arneja, and rather compelled them, also to offer far
better terms than proposed in CA No. 26 of 1985. Seth also wanted to have the
same terms offered to him and tried to go back on the agreement.
At this stage, it will be
appropriate to refer to some of the applications filed in these proceedings.
CA No. 666 of 1984 is an
application filed by Misra and Arneja in CA No. 527 of 1983, under which Seth had
propounded a scheme of arrangement and reconstruction for the revival of the
company. Misra and Arneja stated that they had entered into an agreement dated
November 28, 1984, with Seth and set out some of the terms of the agreement in
the application. It was prayed that Seth be directed to comply with the terms
of the agreement and that Misra and Arneja be allowed to prosecute the appeal
(LPA No. 109 of 1974) through the official liquidator. This application was
disposed of by order dated December 3, 1984, which is as under:
"The applicant who is
interested in the revival of the company under the arrangement with the former
directors of the company would be entitled to assist the official liquidator in
the conduct of the appeal and would be given all possible facilities by the
official liquidator to enable the applicant to give effective assistance. The
set of papers of the appeal would be furnished to the applicant by the official
liquidator at the expense of the applicant".
As noted above, Seth filed
an application (CA No. 26 of 1985) on January 11, 1985, under section 391 of
the Act seeking directions to convene separate meetings of equity shareholders,
preference shareholders and unsecured creditors of the company for the purpose
of considering and, if thought fit, approving with or without modification the
scheme of arrangement of the company which was annexed as annexure
"A". The scheme was proposed on the basis of the agreement dated
November 28, 1984, between Seth and Misra and Arneja. On April 10, 1986, an
order was passed directing convening of the meetings. Reference will have to be
made to the proceedings in CA No. 26 of 1985, and the terms of the scheme of
arrangement in some detail at a later stage in this order.
On January 24, 1985, Misra
and Arneja filed an application (CA No. 49 of 1985) seeking certain reliefs,
inter alia, that the official liquidator be directed to receive scrips for
4,038 equity shares and register their transfer in favour of Misra; Seth be
directed to deliver the remaining 8,962 equity shares and 2,000 preference
shares as per agreement dated November 28, 1984; the official liquidator be
directed to give inspection of the factory premises to the applicants; the
applicants be permitted to enter into correspondence with Punjab National Bank
for settlement of the dues due from the company to the bank; and directing
holding of meetings for considering the scheme of arrangement in terms of the
agreement dated November 28, 1984. Notices of the application were issued to
Seth as well as to the official liquidator and Punjab National Bank. No reply
was filed by any one of them. By order dated February 12, 1985, the court
recorded that apart from the amount of Rs. 51,000 paid by Misra and Arneja to
Seth in terms of the agreement, a further sum of Rs. 2,69,000 had been paid to
Seth on account of the value of 13,000 equity shares and 2,000 preference
shares of the company. This was confirmed by Seth. It was also noted on the
statement of counsel for Seth that share scrips in respect of 4,038 equity
shares along with transfer deeds had already been handed over to Misra and
Arneja and that further share scrips and/or documents in respect of 8,962
equity shares and 2,000 preference shares had also since been delivered to
Misra and Arneja. It was also noted that parties had completed the necessary
documentation in respect of these transactions. Then the order proceeded to
record that counsel for Seth confirmed that he would have no objection to these
transfers being duly registered by the company in accordance with law as and
when such registration was possible. It was also agreed that Misra and Arneja
would be entitled to inspect the factory premises and that they would be
entitled to take with them a chartered accountant or engineer or any other
consultant to make an assessment of its valuation. It was also agreed that
Misra and Arneja might, in consultation with Seth, enter into appropriate
negotiations and correspondence with Punjab National Bank for settlement of the
outstanding dues. Parties also agreed that the official liquidator would
prepare an up-to-date statement of account of the expenditure incurred during
the liquidation proceedings to enable Misra and Arneja to have an idea of the
liability on this count. The order then recorded further agreement between the
parties that Misra and Arneja would be allowed to participate in the meetings
of the creditors without exercising the right to vote and further that to
facilitate the work of Misra and Arneja, Seth would prepare an up-to-date list
of creditors of the company. For this purpose, necessary staff assistance was
to be provided by Misra and Arneja. The court finally observed that these
directions were in aid of the scheme which was still to be referred to the
meetings, if any, and would be incorporated, where-ever necessary, in the
directions when meetings were convened. Lastly, it was mentioned that no
further directions were necessary on the application at that stage which was
disposed of in the terms mentioned above.
CA No. 294 of 1985 was
filed on April 9, 1985, by Misra and Arneja. In this, it was prayed that
directions be issued to the official liquidator to seek clarification of the
order dated January 15, 1985, passed by the Division Bench in LPA No. 109 of
1974 and to take appropriate proceedings to determine the amount which the
company was to pay towards transfer of the factory premises to the company.
Notice of this application was issued to the official liquidator as well as to
Seth. Counsel of both of them accepted notice. No reply was filed by any one of
them. By order dated April 26, 1985, the court directed the official liquidator
to seek clarification as prayed in the application and also allowed other
prayers in the application. It was mentioned that the official liquidator would
take all the steps without delay. Liberty was given to Misra and Arneja to seek
further directions if there was any delay in complying with the directions
given by the court. It may be noted that both Mr. G. S. Vohra and Mr. R. K.
Talwar, advocates, appeared for Misra and Arneja. Mr. R. K. Talwar has also
been appearing for Seth.
CA No. 562 of 1985 was an
application filed by Misra and Arneja on May 23, 1985. It was submitted that in
pursuance of the order dated April 26, 1985, in CA No. 294 of 1985, the
official liquidator did apply seeking clarification of the order of the
Division Bench dated January 15, 1985, passed in LPA No. 109 of 1974 and that
on notice being issued on that application, it was directed by the Division
Bench that the mandamus granted earlier would remain in operation subject to
the applicant (official liquidator) depositing Rs. 12 lakhs on or before May
31, 1985. It was submitted that the applicants were interested in
revival/reconstruction of the company and under an arrangement with Seth had
already acquired over 75% of the equity shareholding of the company and were
thus anxious to deposit the amount of Rs. 12 lakhs before May 31, 1985, and
were having in their possession two pay orders for Rs. 6 lakhs each in favour
of the Registrar of this court. It was, therefore, prayed that Misra and Arneja
be allowed to deposit the amount of Rs. 12 lakhs. The court directed issue of
notice of the application to the official liquidator and it was ordered that
subject to further directions that might be given by the Division Bench on the
application seeking clarification, Misra and Arneja might deposit Rs. 12 lakhs
in this court, but that the amount would, however, not be disbursed without
notice to Misra and Arneja.
CA No. 855 of 1985 was an
application filed by Misra and Arneja on September 5, 1985. In this, certain
details were given that under the agreement dated November 28, 1984, the
applicants had so far paid a sum of Rs. 33 lakhs in aid of the scheme of
arrangement proposed in CA No. 26 of 1985. It was stated that the applicants
held requisite majority of equity and preference shareholding and that they
were also the creditors of the company. In these circumstances, it was
mentioned that the scheme had the requisite support of the shareholders of the
company, and therefore the meetings of the equity and preference shareholders
be dispensed with. A direction was also sought to be issued to the official
liquidator to file details of the claims received by him in pursuance of an advertisement
directed to be published in certain newspapers as per court's order dated July
25, 1985, in CA No. 26 of 1985. Notice of the application was issued to the
official liquidator. There are, however, on record, replies filed by Kelvinator
of India Ltd. as well as by Seth. The official liquidator also filed his reply.
The reply of Seth which, though dated January 30, 1986, but filed on April 5,
1986, states that the sale of shares was conditional and contingent upon the
approval of the scheme of revival of the company failing which the amount of
consideration was refundable against return of shares. It was stated that it
was not proper to dispense with the meetings of the equity and preference
shareholders of the company. This reply was filed through Mr. P. C. Khanna and
Mrs. Reva Khetrapal, advocates. The official liquidator, in his reply, stated
that the proposed scheme had not yet been put to the shareholders and creditors
of the company and unless it was so put before them, it could not be said that
the scheme had the support of the requisite majority of the shareholders and
creditors of the company and that therefore the scheme be referred to the
shareholders and members of the company.
On September 5, 1985, Misra
and Arneja filed another application, it being CA No. 856 of 1985. In this it
was stated that certain acquisition proceedings under the Land Acquisition Act
had been started in respect of certain land comprising the factory premises of
the company and, therefore, a direction was sought to be issued to the official
liquidator to challenge the acquisition proceedings in the Punjab and Haryana
High Court at Chandigarh. By order dated September 11, 1985, the official
liquidator was directed to take steps to represent the case of the company against
acquisition of the land. Permission was also granted to the official liquidator
to file a writ petition in the High Court at Chandigarh, if necessary. It was
also directed that legal expenses so incurred would be borne by Misra and
Arneja which would include the fee payable to the counsel engaged by the
official liquidator. It was also mentioned that the official liquidator might
engage a senior counsel for the purpose in consultation with Misra and Arneja.
CA No. 949 of 1985 is an
application by Misra and Arneja seeking to place on record facts relating to
settlement of dues of Punjab National Bank. This application was filed on
September 25, 1985. It is stated in the application that Misra and Arneja had
already acquired over 75% of the equity shareholding of the company by paying a
sum of Rs. 3,20,000 on account of the value of 13,000 equity shares and 2,000
preference shares of the company. It is also mentioned that an amount of Rs
12,00,000 had also been deposited by these persons in terms of the order dated
May 17, 1985, of the court which amount was towards cost of land and building
of the company at Faridabad. Lastly, it is mentioned that the company owed a
sum of over Rs. 60 lakhs to Punjab National Bank and that now a settlement had
been arrived at between the bank and the applicants to the effect that the
applicants would pay a sum of Rs. 19,18,000 in full and final settlement of the
claim of the bank and that an amount of Rs. 15 lakhs had already been paid to
the bank. Then, it is mentioned that the balance amount of Rs. 4,18,000 was to
be paid in three years' period from the date of settlement or two years from
the date of sanction of the scheme, whichever was earlier. A letter of Punjab
National Bank dated September 4, 1985, addressed to Seth with a copy to Misra
recording the aforesaid arrangement was also filed. There are on record replies
filed by Kelvinator of India Ltd. and Seth. Notice of this application was
issued only to the official liquidator as well as to Punjab National Bank. They
did not file any replies. The reply by Seth, though dated November 5, 1985, was
filed on January 28, 1986. With this reply, Seth filed a copy of the letter
dated September 4, 1985, of the bank as well as his reply thereto. The bank
letter referred to discussions held with Misra and Arneja and acknowledged
receipt of Rs. 15 lakhs from them. The bank also mentioned that the balance of
Rs. 4,18,000 should be made to be secured under the consent decree in the suit
filed by the bank against the company and the guarantors. The bank, therefore,
suggested that a suitable guarantee/security be provided to it by Misra and
Arneja and securities/guarantees held by the bank at present could be released
thereafter. Seth, in his reply letter to the bank, suggested that the official
liquidator be approached for the purpose of getting a consent decree. He also
said that he was trying with Misra and Arneja to give to the bank a bank
guarantee for payment of the balance amount of Rs. 4.18 lakhs "which will
obviate the need of any consent decree by the official liquidator". Seth
wanted some time for the purpose. A copy of this reply letter was also endorsed
to Misra and Arneja with a request to arrange for a bank guarantee
CA No. 963 of 1985 is an
application by Misra and Arneja filed on October 4, 1985, praying that the
official liquidator be directed to register transfer of 13,000 equity shares
and 2,000 preference shares in their favour under the provisions of section
536(2) of the Act and the official liquidator be further directed to challenge
the demand of Tahsildar (Sales) cum-Managing Officer, Faridabad, wherein he had
calculated the amount of interest in pursuance of the order dated January 15,
1985, of the Division Bench in LPA No. 109 of 1974. A prayer was also made that
the official liquidator be directed to furnish copies of the claims which he
might have received in response to publication of notices as per the order
dated July 25, 1985, in CA No. 26 of 1985. This application is pending only as
regards the request of Misra and Arneja under section 536(2) of the Act. Again,
Kelvinator of India Ltd. and Seth have submitted their replies. The reply of
Seth though dated November 5, 1985, was filed only on April 5, 1986.
CA No. 1016 of 1985 was
filed by Misra and Arneja on October 30, 1985, praying that the official
liquidator be directed to file a writ petition in the High Court at Chandigarh
to challenge the land acquisition proceedings in terms of earlier orders of the
court and further to file a caveat in the Supreme Court in respect of the
S.L.P. filed by the Union of India against the judgment dated January 15, 1985,
in LPA No. 109 of 1974.
In CA No. 1017 of 1985 also
filed by Misra and Arneja, more directions were sought to be issued to the
official liquidator. Both these applications were disposed of by order dated
May 8,1986, and the official liquidator was directed to take expeditious steps
in the matter and move the Punjab and Haryana High Court. A similar application
(CA No. 340 of 1986) was also filed by Kelvinator of India Ltd. and was
disposed of by order dated May 8, 1986. Both Kelvinator of India Ltd. and Misra
and Arneja were to assist the official liquidator in filing writ petition in
the High Court at Chandigarh and they were to share the costs equally.
Before I deal in detail
with CA No. 26 of 1985 filed by Seth as shareholder of the company under
section 391 of the Act and other applications pending decision including those
of Kelvinator of India Ltd., I will note that there have been other
applications filed by Misra and Arneja on which orders were made by the court
from time to time. All this would show that Misra and Arneja have been actively
associated in these proceedings and they have been described as propounders of
the scheme of arrangement mentioned in CA No. 26 of 1985 though they have not
been recognised either as creditors or as shareholders of the company. On
filing of CA No. 26 of 1985, notice was issued to the official liquidator as
well as to Punjab National Bank. Thereafter, the matter had been kept pending
for the purpose of arriving at some arrangement between the company and Punjab
National Bank. In the earlier proceedings, Mr. R.K. Talwar had been shown to be
the counsel for the applicant, Seth, and Mr. G. S. Vohra as counsel for the
propounder. Mr. Vohra has throughout been representing Misra and Arneja.
Pending settlement with the bank on the suggestion of counsel for the
propounder (Mr. G. S. Vohra), the court ordered on July 25, 1985, that an
advertisement be published in leading newspapers inviting claims so as to have
a fair idea of the indebtedness of the company. This was apart from the amount
claimed by the bank. The expenses for advertisement were to be borne by the
propounder, i.e., Misra and Arneja.
Meanwhile, Kelvinator of
India Ltd. also filed on April 29, 1985, an application (CA No. 414 of 1985)
under section 391 of the Act proposing a scheme of arrangement. The scheme was
annexed with the application.
By a detailed order dated
April 10, 1986, the court directed holding of the meetings of the members and
unsecured creditors of the company for the purpose of considering the scheme of
arrangement propounded in CA No. 26 of 1985. Various directions were given for
the holding of both types of meetings. By this time, Seth and Misra and Arneja
had fallen out and so, it appears, the necessity for directions arose.
By a separate order dated
April 15, 1986, meetings of the members and creditors of the company were also
ordered to be held to consider the scheme propounded by Kelvinator of India
Ltd. in CA No. 414 of 1985. H.R. Khera, who claimed to be a member of the
company, had earlier been impleaded by an order in CA No. 58 of 1986 as a
co-petitioner and propounder of the scheme in CA No. 414 of 1985 of Kelvinator
of India Ltd. Mr. Khera, therefore, became a co-petitioner and propounder in
that. Again, detailed directions were issued for the holding of the meetings.
No meetings could be held
as ordered and the chairman of the meetings, Mr. Justice Prakash Narain, a
former Chief Justice of this court, submitted his interim report dated July 12,
1986. The chairman said that there was difference of opinion regarding the
lists of shareholders and creditors which, he said, was not within his power to
decide or adjudicate upon. Thus, in effect, the chairman desired directions
regarding the shareholders and creditors to whom the notices had to be issued.
This opened a Pandora's box. The questions which were left undetermined by
order dated April 10, 1986, in CA No. 26 of 1985 and that dated April 15, 1986,
in CA No. 414 of 1985 now fell to be decided.
On July 16, 1986, Misra and
Arneja filed an application (CA No. 1818 of 1986), for settling the lists of
creditors and shareholders and for fixing a date for the holding of meetings of
the creditors and shareholders.
Then, on March 2, 1987, one
Subash Chander, claiming to be a shareholder of the company, filed an
application (CA No. 158 of 1987), praying that the schemes proposed be rejected
and the process of winding up be expedited as it would be more beneficial to
the members, creditors and even the Government. In the alternative, it was
prayed that the assets of the company be sold through public notice. Yet
another alternative suggested was that a portion of the area of the land of the
company be sold and the money realised be used for paying off the liabilities
of the company and the balance utilised for rehabilitating the business of the
company. On notice being issued, the official liquidator, Misra and Arneja and
Kelvinator of India Ltd. filed replies. No reply was filed by Seth.
By CA No. 277 of 1987 filed
on March 30, 1987, Misra and Arneja brought on record the fact of settlement of
the suit filed by Punjab National Bank against the company and the guarantors
stating that the whole of the amount of Rs. 19 18 lakhs in full discharge of
the liability of the company was paid by them and that on making all these
payments, the suit had been withdrawn by the bank. This application contained
an endorsement by Mr, S. R. Yadav, learned counsel for Punjab National Bank, to
the effect that the entire amount of Rs. 19 18 lakhs had been paid by Misra and
Arneja.
Misra and Arneja filed yet
another application (CA No. 280 of 1987) on April 1, 1987, bringing on record a
letter dated February 11, 1985, written by Seth to them, the terms of which
were confirmed by Misra and Arneja on February 11, 1985, itself. It was
mentioned in this letter that in pursuance of the agreement dated November 28,
1984, Seth had already handed over 4,038 equity shares of the company to Misra
and Arneja which they had already submitted to the court for transfer. It was
further stated that documents for transfer in respect of the remaining 8,962
equity shares and 2,000 preference shares had been delivered to Misra and
Arneja on February 11, 1985. Seth confirmed having received payment of
"agreed" consideration of Rs. 51,000 on November 28, 1984, and the
balance of Rs. 2,69,000 on February 11, 1985, "in full and final
settlement due against the said 13,000 equity shares and 2,000 preference
shares", Seth also mentioned in this letter that "for effecting the
transfer of these shares you may please file the same with the Hon'ble High
Court, official liquidator". The following para in this letter would be
quite relevant:
"I further assure you
that to facilitate the transfer of shares, I hereby undertake that if for the
registration of transfer of the shares, any further or additional document(s)
is/are asked for by the Hon'ble High Court of Delhi/official liquidator, I
shall furnish the same on demand without any hitch and hindrance. In case the
High Court does not agree for the transfer of shares, I undertake to refund the
amount of Rs. 3,20,000 on return of the aforesaid 15,000 nos. shares and
connected documents given by me to you".
Lastly, Seth hoped that
with the co-operation of Misra and Arneja, he would take steps "to get the
revival scheme already filed in the High Court approved from the court".
During the course of the
hearing of all these matters, it was submitted before me that Misra was a
non-resident Indian and could not hold shares in the company. This led to the
filing, on March 31, 1987, of an application by Misra, it being CA No. 279 of
1987. He stated that he became a non-resident Indian only with effect from
April 1, 1985, while the agreement in question had been entered into earlier to
this date. Along with this application, he filed photo copies of his letter
dated February 12, 1987, to the Reserve Bank of India and the reply dated March
12, 1987, of the Reserve Bank of India thereto. In his letter dated February
12, 1987, Misra wrote that he became a non-resident in the year 1985 and that
earlier he had taken permission from the Reserve Bank of India to retain shares
and directorship in Indian companies and in that connection he referred to a
letter dated November 27, 1984, of the Reserve Bank of India. Misra also wrote
that he was under an impression that he was to obtain permission from the
Reserve Bank of India only in respect of shares in Indian companies, and that
he had other assets and liabilities, a statement of which was sent along with
the letter. If reference is made to this statement, Misra has shown that a sum
of Rs. 1,29,920 was lying in deposit with Seth and that this amount had been
paid to Seth for the purchase of shares of the company which shares belonged to
Seth and his group. It was also mentioned that this payment was made to Seth
when Misra was a resident and that, due to certain court cases, these shares
had not been transferred in the name of Misra. Misra, therefore, wanted that
permission might be granted for such a transfer as and when the court allowed
the transfers. Both Seth and Kelvinator of India Ltd., have filed their replies
to this application. Their stand is that no permission from the Reserve Bank of
India has been obtained by Misra for transfer of the shares and till such time
that the Reserve Bank of India grants approval to the holding of shares by
Misra, the court cannot permit transfer of shares.
Also, during the course of
hearing, Kelvinator of India Ltd. also filed two applications and these may be
referred to. In CA No. 94 of 1987, it wanted to place on record another scheme
and it was stated that it was so because the contesting parties, during all
this period, improved upon their original respective schemes. It was stated
that the present scheme contained amendments to the original scheme proposed by
the applicant. The other application is CA No. 281 of 1987. The applicant,
Kelvinator of India Ltd., wanted the court to pass an order that, in case the
scheme propounded by Seth along with Misra and Arneja was rejected and that
propounded by the applicant was approved, it would deposit within one week of
such sanction a sum sufficient to cover the refund of investment with
reasonable amount of interest to Misra and Arneja which amount in turn would be
treated as a long term-loan to the company.
Seth also filed an
application (CA No. 300 of 1987) wherein it was stated that in view of the improved
financial position of the company, the scheme originally propounded be amended
so as to offer more to the shareholders as well as to the creditors of the
company.
It was the submission of
Mr. Ved Vyas, Senior Advocate, in CA No. 158 of 1987, that the schemes
propounded by Seth and Kelvinator of India Ltd., be rejected and the orders
dated April 10, 1986, in CA No. 26 of 1985 and dated April 15, 1986, in CA No.
414 of 1985 convening the meetings be recalled. He said both the schemes were
inherently bad and unsatisfactory, though that propounded by Kelvinator of
India Ltd., was a shade better. He said that no proper project was put forward
by Seth and there was no scheme as such which was to be considered by the
shareholders and creditors of the company in their meetings ordered to be held
by the court. Mr. Ved Vyas said that at least since after the decision of the
Division Bench in LPA No. 109 of 1974, circumstances had vastly changed and the
property of the company was valued at about Rs.3 crores and the company as such
was able to pay off all the creditors in full with interest at such rate as the
court might fix. He also said that the value of the shares had increased
manifold and as per his estimate, the value of each equity share of Rs. 100 would
be around Rs. 1,100. He also pointed out that even a part of the land of the
company could be sold to pay off all the creditors and the remaining land and
the building could be utilised for revival of the company, if there was a
proper scheme before the court. With reference to the scheme propounded by
Seth, Mr. Ved Vyas did refer to certain defects therein to show that the scheme
was not at all practicable and that the aim was only to grab the valuable
property of the company without any intention to re-start the factory.
Referring to the monies so far put in by Misra and Arneja, Mr. Ved Vyas said
that their money could be returned with reasonable rate of interest. He did,
however, acknowledge the part played by Misra and Arneja in investing their
monies and ultimately getting the sale deed of the land and building registered
in the name of the company. Mr. Ved Vyas said that holding of the meetings as
ordered by the court was an exercise in futility and everyone should be saved
unnecessary expense. In support of his argument, Mr. Ved Vyas referred to a
decision of the Calcutta High Court in Bengal National Textile Mills Ltd., In re [1986] 59 Comp
Cas 956, wherein it was said that the court
had jurisdiction to consider the scheme before the meeting and to recall the
order for calling the meeting. The court, however, on the facts of that case,
held that it was not necessary to recall the order calling the meeting of
creditors. In the present case before me, in CA No. 26 of 1985 and CA No. 414
of 1985, the court directed by detailed orders holding of separate meetings of
the members and creditors of the company. The matter, however, came back to the
court on the interim report of the chairman of the meetings for settling in
effect the list of creditors and shareholders of the company. I do not find any
pressing reason in the application of Subhash Chander (CA No. 158 of 1987) to
recall the orders calling for the meetings. I need not, therefore, discuss the
merits or otherwise of both the schemes. No prejudice is likely to be caused to
Subhash Chander, if the meetings as ordered are held. After all, ultimately, it
is the court who is to sanction the schemes. At that stage, the applicant,
Subhash Chander, will have ample opportunities to contend that the proposed schemes
should not be sanctioned and that he will be entitled to raise such objections
to the schemes as are permissible under the law.
I will note that Mr. Ved
Vyas did get support from Mr. P.C. Khanna, Senior Advocate, appearing for Seth.
Mr. Khanna contended that at the time when the agreement dated November 28,
1984, was entered into between Seth on the one part and Misra and Arneja on the
other, the company was insolvent, but when LPA No. 109 of 1974 was decided in
favour of the company, the company had assets valued at more than its debts and
that the company, though in liquidation, became solvent. He said anybody who
could make full payments to the creditors with interest could not be said to be
insolvent and there could thus be no need for any scheme or arrangement. He
also said that the propounding of a scheme in terms is superfluous when a
company is a solvent one. Mr. Khanna also acknowledged the amounts spent by
Misra and Arneja and agreed with Mr. Ved Vyas that these could be returned with
interest. Mr. Khanna also said that no meetings should be held as ordered
earlier as the company was no longer insolvent and that there was no question
of any composition. It was difficult to appreciate the arguments of Mr. Khanna.
He could not make a forthright submission that he was withdrawing his
application, CA No. 26 of 1985. Even, according to Mr. Khanna, the company
became solvent only after the passing of the order dated January 15, 1985, of
the Division Bench in LPA No. 109 of 1974 while CA No. 26 of 1985 had been
filed on January 11, 1985. The company has already been ordered to be wound up.
Mr. Chandrasekharan, learned counsel for Kelvinator of India Ltd., however,
submitted that it was not a stage to recall the orders directing holding of the
meetings. He said even if some details were lacking, these could always be
given at a later stage and while sending notices under section 393 of the Act
or even at the time of holding of the meetings. I would, therefore, dismiss the
application of Subhash Chander (CA No. 158 of 1987).
With reference to the
application of Misra and Arneja (CA No. 963 of 1985) for directions regarding
registration of shares under section 536(2) of the Act, Mr. Vohra said that
there was no impediment and the court should, in the circumstances of the case,
direct registration of shares of the company in the names of Misra and Arneja
and their nominees as agreed to between the concerned parties. Sub-section (2)
of section 536 of the Act is as under:
"(2)
In the case of a winding up by or subject to the supervision of the court, any
disposition of the property (including actionable claims) of the company, and
any transfer of shares in the company or alteration in the status of its
members, made after the commencement of the winding up, shall, unless the court
otherwise orders, be void".
Mr. Vohra said that as
between the transferor and transferees of the shares in question, the agreement
was valid and proper consideration had passed. He said that the transfer of
shares was in no way against the interest of the company or against any other
member or creditor and that there was no reason why the court should not
validate the transaction. Mr. Vohra said that the court was given vast powers
under subsection (2) of section 536 of the Act in order that the interests of
the company in winding up were not harmed in any way. He said that the idea was
that the shares, which had not been fully paid up, should not be allowed to be
transferred so that "men of straw do not find a perch on the register of
members". He said this was not so in the present case as the shares were
fully paid up and the association of Misra and Arneja in the proceedings in the
case showed that they were in a position to revive the company and had already
got substantial interest in the affairs of the company. Mr. Khanna, learned
counsel for Seth, however, questioned the validity of the agreement dated
November 28, 1984 itself and said it was the result of duress and undue
influence exercised on Seth, inasmuch as at the relevant time, Seth was in dire
circumstances and was not in a position to exercise his free will. According to
Mr. Khanna, Misra and Arneja were in a dominant position and in any case, he
said, the agreement was only contingent and;the necessary conditions not having
been achieved, the agreement was to be avoided. As to how the agreement dated
November 28, 1984, was not in the interest of the company, Mr. Khanna submitted
that it was Seth who had nurtured the company from its very beginning and when
today the company could not be said to be insolvent, it would be Seth who would
be best equipped to revive the company. Mr. Khanna also said that the land of
the company was so valuable that a part of it could be sold to pay off all the
creditors. He also questioned the motives of Misra and Arneja in investing
their monies in the company till now, and he said they could also be paid off
with interest.
It could not be disputed
that as between transferor and transferee, a transfer of shares executed after
the commencement of winding up was valid, whether it was executed in
performance of a contract made before or after that time. A somewhat different
note was, however, struck in Sullivan v. Henderson [1973] 1 All ER 48 (Ch D).
The court therein was examining the provisions of section 227 of the English
Companies Act, 1948, which is akin to sub-section (2) of section 536 of the
Act. It observed at pages 50-51 as under:
"It may thus be said
that the plaintiff is seeking specific performance of a contract which statute
has declared to be void unless the court (that is, the Companies Court)
otherwise orders. Without canvassing the question of whether a judge of the
Chancery Division, when not sitting for the purpose of exercising the court's
company winding-up jurisdiction, could make an order under the section, or
whether this is a fit case for such an order, counsel for the plaintiff
contended that Re Onward Building Society [1891] 2 QB 463, especially at p.
475) showed that the word ' void ' in the section merely meant void quoad the
company and not void as between vendor and purchaser. He accepted, however,
that even on this footing there may be grave reasons why no order for specific
performance should be made in such a case. If before any question of a
winding-up has arisen, V contracts to sell shares in a company to P, and then,
after a winding-up order has been made, V sues P for specific performance, I
think that any court would be most reluctant to force upon P, who had agreed to
take a fully effective transfer of the shares, a transfer that, although valid
as between him and the vendor, would be void as against the company. Counsel
for the plaintiff was not able to contend for any contrary view; and in my
judgment it would require remarkable circumstances to support making a decree
in such a case. This plainly is not such a case, and in my judgment the claim
for specific performance must fail".
Reference may, however, be
made to a decision of the Supreme Court in Vasudev Ramchandra Shelat v. Pranlal Jayanand Thakar
[1975] 45 Comp Cas 43 (SC). In this case, a
lady, Ruxmani, executed a registered gift deed donating certain shares in
various limited companies to Vasudev, her brother. She also signed several
blank transfer forms apparently intended to be filled in by Vasudev so as to
enable him to obtain the transfer of the donated shares in the registers of the
companies and share certificates in his own name. Before the shares could be
transferred Ruxmani, however, died. A nephew of her late husband disputed the
claim of Vasudev to those shares. A Division Bench of the Gujarat High Court
held that the gift was incomplete for failure to comply with the formalities
prescribed by the Indian Companies Act, 1913, for transfer of shares. It also held that there
was no equity in favour of Vasudev so that he may claim a right to complete
what was left incomplete by the donor, Ruxmani, in her lifetime even though
there could be no doubt that Ruxmani had intended to donate the shares to
Vasudev. Two points which were raised before the Supreme Court by the
respondent were as under (at page 48):
"(2) Although
shares are 'goods' as denned by the Sale of Goods Act, yet they are ' goods '
of a special kind. Their transfer is not completed merely by the execution of a
registered document or by delivery, but the correct mode of transfer is
determined by the character of these 'goods'. Section 123 of the Transfer of
Property Act lays down only a general mode of transfer by gift for goods in
general but not for the transfer by gift of shares which are a special type of
' goods' capable of transfer only in accordance with a special mode prescribed
by the Indian Companies Act of 1913, which was applicable at the relevant time.
In other words, an adoption of the prescribed form of transfer is of the
essence of a transfer for all purposes and not merely as between the
shareholder and the company concerned".
"(4) Since material portions of the transfer form
given in regulation 19 of Table A of the First Schedule to the Indian Companies
Act of 1913 were under filled in, the doctrine of ' substantial compliance '
with the required form could not come to the aid of the applicant".
The
court observed that the wide definition of "property "in section 6 of
the Transfer of Property Act included not merely shares as transferable,
movable property, but would cover, as a separable form of property, a right to
obtain shares which might be antecedent to the accrual of rights of a
shareholder upon the grant of a share certificate in accordance with the
articles of association of a company. It also observed "that a share
certificate is a prima facie evidence under section 29 of the Act, of the title
to a share. Section 34 of the Act does not really prescribe the mode of
transfer but lays down the provisions for ' registration ' of a transfer. In
other words, it presupposes that a transfer has already taken place. The manner
of transfer of shares, for the purposes of company law, has to be provided, as
indicated by section 28, by the articles of the company, and, in the absence of
such specific provisions on the subject, regulations contained in Table ' A' of
the First Schedule to the Companies Act apply".
The
court also observed as under (at page 52):
"The
requirements of form or mode of transfer are really intended to ensure that the
substantial requirements of the transfer have been satisfied. They subserve an
object. In the case before us, the requirements
of both section 122 and section 123 of the Transfer of Property Act were
completely met so as to vest the right in the donee to obtain the share
certificates in accordance with the provisions of the company law. We think
that such a right is in itself 'property' and separable from the technical
legal ownership of the shares. The subsequent or ' full rights of ownership '
of shares would follow as a matter of course by compliance with the provisions
of company law. In other words, a transfer of 'property' rights in shares,
recognised by the Transfer of Property Act, may be antecedent to the actual
vesting of all or the full rights of ownership of shares and exercise of the
rights of shareholders in accordance with the provisions of the company
law".
The observations of the
Supreme Court are with reference to the Indian Companies Act, 1913.
Thus, the court held that
on a correct interpretation of the gift deed and other facts of the case, it
was of the opinion that the right to obtain a transfer of shares was clearly
and completely obtained by Vasudev, the donee. It was also held that there was
no question here of competing equities because the donee was shown to have
obtained a complete legal right to obtain shares under the gift deed and an
implied authority to take steps to get his name registered.
Thus, if I look at the agreement
between the parties for transfer of shares, it is quite in order. I cannot
accept the contention of Mr. Khanna that Misra and Arneja were in a dominant
position to dictate term? to Seth. There was no inequality of bargaining power
between the parties and the events which I have narrated above would show that
the agreement was entered into of the free will and accord of the parties. Seth
has taken full advantage of the agreement. The agreement has been referred to
in various orders in these proceedings and at no point of time did Seth plead
invalidity of the agreement on any ground. In fact, he had been supporting the
agreement and receiving payments thereunder even after the decision in LPA No.
109 of 1974. He even got his immovable property released from the mortgage
which he had given as security for the loan given by Punjab National Bank to
the company. I repeatedly asked Mr. Khanna as to at what point of time did it
dawn upon Seth that the agreement for transfer of shares and assignment of credits
was in any way illegal. There was no specific answer and the record shows that
it was some time only in January, 1986, that Seth had second thoughts. Mr.
Khanna referred to a decision of the Supreme Court in Central Inland Water Transport
Corporation Ltd. v. Brojo Nath Ganguly [1986]
60 Comp Cas 797, to contend that the court should step in and set aside the
agreement on the principles laid down in that judgment. I am afraid I cannot
agree. Though this judgment of the Supreme Court is a landmark and sets a
different trend in the law of contract, yet the principles laid down therein
cannot be applied to the present case. The following observations in para 90 of
the report would be relevant and are as under (at page 857 of Comp Cas):
"This principle is
that the courts will not enforce and will, when called upon to do so, strike
down an unfair and unreasonable contract, or an unfair and unreasonable clause
in a contract, entered into between the parties who are not equal in bargaining
power. It is difficult to give an exhaustive list of all bargains of this type.
No court can visualize the different situations which can arise in the affairs
of men. One can only attempt to give some illustrations. For instance, the
above principle will apply where the inequality of bargaining power is the
result of great disparity in the economic strength of the contracting parties.
It will apply where the inequality is the result of circumstances, whether of
the creation of the parties or not. It will apply to situations in which the
weaker party is in a position in which he can obtain goods or services or means
of livelihood only upon the terms imposed by the stronger party or go without
them. It will also apply where a man has no choice, or rather no meaningful
choice, but to give his assent to a contract or to sign on the dotted line in a
prescribed or standard form or to accept a set of rules as part of the
contract, however unfair, unreasonable and unconscionable a clause in that
contract or form or rules may be. This principle, however, will not apply where
the bargaining power of the contracting parties is equal or almost equal. This
principle may not apply where both parties are businessmen and the contract is
a commercial transaction. In today's complex world of giant corporations with
their vast infrastructural organizations and with the State through its
instrumentalities and agencies entering into almost every branch of industry
and commerce, there can be myriad situations which result in unfair and
unreasonable bargains between parties possessing wholly disproportionate and
unequal bargaining power. These cases can neither be enumerated nor fully
illustrated. The court must judge each case on its own facts and
circumstances".
There could be thus no challenge
to the agreement between Seth, Misra and Arneja regarding transfer of shares
and assignment of credits. On second thoughts, I think that the whole of the
discussion on this point was unnecessary as Seth did not challenge the
agreement at all as various orders in the proceedings as reproduced above would
go to show. Seth took full benefits under the agreement and on payment made by
Misra and Arneja to Punjab National Bank even got his immovable properties
released which were mortgaged with the bank by way of security. In fact, I
should not have permitted Mr. Khanna to address arguments on the question of
validity of the agreement. Certainly, the agreement was entered into before LPA
No. 109 of 1974 was decided, but even thereafter, the parties acted on the
agreement. If the agreement is looked into, it was with reference to the scheme
proposed in CA No. 527 of 1983, which was, as noted above, withdrawn as the new
scheme was filed with CA No. 26 of 1985. So much so that, earlier, under the
agreement, Punjab National Bank was to be paid Rs. 14 lakhs in settlement of
its dues from the company, but ultimately Misra and Arneja had to pay Rs. 19 18
lakhs to settle the suit of the bank against the company and others which was
for recovery of Rs. 24,87,547 95. Seth had been the direct beneficiary of this
settlement with the bank. On receipt of this amount, the suit of the bank was
satisfied and the guarantors including Seth were released from their liability
and their documents of title returned to them. It was contended by Seth that he
would stand subrogated in place of bank in respect of the property of the
company for which the bank was mortgagee. This contention is quite meaningless.
No particulars of the mortgage property were given. If reference is made to the
bank suit, it will be seen that only some items of the machinery of the company
had been mortgaged to the bank. Moreover, it is quite clear that the credits
held by the bank were to be assigned to Misra and Arneja. There was in fact a
tripartite agreement between the bank, Seth, Misra and Arneja under which Misra
and Arneja became creditors of the company in respect of the amounts due to the
bank. It appears to me that the agreement was entered into bona fide and in the
interest of the company. It is just that when now prices of land have gone up
and other shareholders and creditors are likely to get more under the two
schemes than what Seth got under the agreement dated November 28, 1984, that he
now wants to extricate himself from the agreement. This he cannot do. He may at
this stage repent or may consider himself unfortunate, but then, the agreement
is a "commercial transaction". Nothing has been shown either in law
or on facts to invalidate the agreement. In the application (CA No. 26 of
1985), Seth has described the state of affairs of the company but stated that
despite its liabilities, the company had potentialities and the sick industrial
unit could be rehabilitated under the direction and supervision of the court.
He was, therefore, proposing the scheme of arrangement which envisaged payment
of the amount of 50% to the creditors and 20% of the amount on equity shares
and 30% on the preference shares with no arrears of dividend payable on the
preference shares. He said that the rehabilitation of the sick industrial unit
in question was not only in the interest of its creditors and contributories
but also greatly in public interest. Again, he said that Punjab National Bank,
though claiming to be a secured creditor was, in fact, not so and had to be
treated as an unsecured creditor. He said that the bank was to be paid Rs. 14
lakhs in full and final settlement of its dues from the company and that the
financiers, namely, Misra and Arneja, had agreed to pay all the amounts under
the scheme for the revival of the company. The application also described as to
how Misra and Arneja were in sound financial condition and their experience to
run the company when revived. It was also mentioned in the application that
subject to the approval of the court, Seth had undertaken to secure the
transfer of the controlling block of shares (13,000 equity shares and 2,000
preference shares) in favour of Misra and Arneja at the rate of Rs. 20 per
equity share and Rs. 30 per preference share. It was then mentioned that after
the requisite sanction, it was proposed that the shares would be registered in
the names of Misra and Arneja in the books of the company after receipt of the
agreed consideration by the applicant. Other details regarding land and
building sheds of the company at Faridabad and the pendency of the Letters
Patent Appeal were also given, but these have already been referred to above.
The fact remains that the agreement dated November 28, 1984, was varied and, I
would say, to the advantage of Seth who received whole of the amounts under the
agreement and Misra and Arneja had to meet more liabilities than was agreed to
under the agreement. The objections of Mr. Khanna to the agreement are
absolutely of no avail.
The question then arises
whether a direction is to be issued to the official liquidator to register the
transfer of shares in question. As noted above, it has not been pointed out
whether transfer of such shares would be against the interest of the company in
any way. Rather it is apparent that the agreement was entered into between the
parties honestly and in the ordinary course of business. The law which makes
transfer of shares and alteration in the status of members void operates for
the benefit of the company and its creditors and not for the benefit of any
third party. There has not been any opposition by the official liquidator to
such a transfer of shares being registered. In fact, he himself sought
directions on the request of Misra and Arneja regarding transfer of shares in
their names. After the passing of the winding up order, the official liquidator
is to conduct the proceedings in winding up the company and perform such duties
in reference thereto as the court may impose (sub-section (1) of section 451).
Section 457 of the Act describes the powers of the liquidator. An order of
winding up is also notice of discharge to the officers and employees of the
company except when the business of the company is continued (sub-section (3)
of section 445). It, thus, appears that on making a winding up order, officers
including the directors and employees of the company would cease to act as
such. There would be thus no board of directors of the company and the
provisions of Part IV of the Act, which, to my mind, apply to a company not in
winding up, would in fact become inapplicable. Mr. Gower, in his book
Principles of Modern Company Law, Fourth edition, describes the status of the
official liquidator in the following words (pages 726-727):
"The exact legal
status of the liquidator is difficult to define. The closest analogy seems to
be that of directors, whose functions he assumes on appointment, and like them
he is probably best described as a fiduciary agent of the company. Again, like
directors, he is often described as a trustee, but this appears to be equally
inaccurate in his case. As already mentioned, the property of the company does
not vest in him; the company continues in existence and when he makes a
contract, he does so on behalf of the company. Unlike the receiver for
debenture-holders, the liquidator is, therefore, not normally personally liable
on his contracts.
On the other hand, the
liquidator has special statutory duties imposed on him and is in a fiduciary
relationship not only to the company but also to the creditors as a body,
though not to individual creditors".
According to the learned
author, perhaps the most important rule of all is the basic principle of
company liquidation, namely, that on winding up, the board of directors
"becomes functus officio and its powers are assumed by the
liquidator"
It appears to me that the
court has full discretion in the matter of transfer of shares where the company
is being wound up and that the exercise of discretion of the court would be
controlled only by the general principles of justice and fairness. Reference
may also be made to the provisions of section 426, sub-section (2) of section
446, section 467 and sub-section (2) of section 526 of the Act. In Mannalal
Khetan v. Kedar NathKhetan [1977] 47 Comp Cas 185 (SC), it was held that the
provisions contained in section 108 of the Act were imperative. The court held
that the words "shall not register a transfer of shares "appearing in
subsection (1) of section 108, were mandatory in character and that the
mandatory character was strengthened by the negative form of the language. The
court was, however, dealing with the question thus raised with reference to a
company which was not in winding up. The Act thus does not prescribe any
principles for the court to register the transfer of shares in the case of a
company in winding up. Nevertheless, I am of the opinion that the principles as
contained in section 108 of the Act regarding execution of the instrument of
transfer and payment of stamp duty in general should be applied. One argument
of Mr. Khanna was that the instrument of transfer of shares should have been
lodged within two months as provided under section 108 of the Act. This could
not be so inasmuch as the agreement for transfer of shares qua the company is
in itself void and unless the court validates, there will be no question of
lodging the transfer deeds within the stipulated period of two months. All
these provisions would be applicable in the case of a working or running
company. Misra and Arneja have filed the transfer deeds but these have not been
accompanied with certificates relating to the shares in all cases as it is
stated that some of the share certificates were not available with Seth, having
been lost. Duplicate share certificates could be issued, but the absence of
share certificates, to my mind, cannot come in my way in directing the official
liquidator to register the transfer.
I would, therefore, direct
the official liquidator to register the transfer of shares in terms of the
instrument of transfer filed in court subject, however, to that in case of
Misra, who is stated to be a non-resident, he will produce a specific
permission relating to these shares from the Reserve Bank of India. In Life
Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp Cas 548 (SC), it
is held that even ex post facto permission could be granted. I do not find any
other bar in the Foreign Exchange Regulation Act, 1973, to invalidate the
transaction in spite of the contentions of Mr. Khanna and Mr. Chandrasekharan
to the contrary.
It is correct that by order
dated July 25, 1985, this court in CA No. 26 of 1985 did order, on the
suggestion of counsel for the "propounder ", that an advertisement
might be published in the newspapers inviting claims so as to have a fair idea
of the indebtedness of the company apart from the amount claimed by the bank.
The advertisement is stated to have been published in the Indian Express and
Tribune. The expenses of the advertisement were to be met by the
"propounder". These were met by Misra and Arneja. On that day, Mr.
Vohra had appeared for the applicant (which was perhaps Seth) and Mr. S. R.
Yadav for Punjab National Bank and Mr. J. Kishore with Mr. Baldev Raj for
Kelvinator of India Ltd. Reference to counsel for the propounder would thus
appear to mean Mr. Vohra and that too rightly so, as at that time, Seth was
supporting Misra and Arneja. Some claims were received in pursuance of the
advertisement but I do not think that they have any validity in law inasmuch as
the advertisement was not put in pursuance of the Companies (Court) Rules,
1959. As stated in the order, the advertisement was put in just to get a fair
idea of the creditors of the company and the amounts due to them. Under rule
154, the value of all the debts and claims against the company shall, as far as
possible, be estimated according to the value thereof on the date of the order
of the winding up of the company. Directions given at the hearing of summons
under rule 69 are to be drawn up in Form No. 35. It. says that the value of
each member or creditor shall be in accordance with the books of the company,
and, where the entries in the books are disputed, the chairman shall determine
the value for purpose of the meeting. It is not disputed that the statement of
affairs as required under sub-section (1) of section 454 of the Act was filed
giving the details of the debts and liabilities of the company. I am of the
view that the creditors named in the statement of affairs be taken to be the
creditors for the purpose of the meetings in question except where the credits
have been lawfully transferred. In the present case, there is no dispute that
the credits amounting to Rs. 4,88,996 24 as mentioned in annexure "D"
to the agreement dated November 28, 1984, were rightly transferred to Misra and
Arneja. This has been admitted in the replies filed by Seth in CAs Nos. 949 of
1985 and 963 of 1985. Misra and Arneja will have to be treated as creditors in
place of the persons whose names are mentioned in annexure "D "to the
agreement with the amounts shown against their names. Reference was made to an
order dated February 12, 1985, in CA No. 49 of 1985 which has been mentioned in
detail above, that Misra and Arneja would be allowed to participate in the
meeting of creditors without exercising the right to vote. To contend that
Misra and Arneja would be debarred from voting in the meeting of creditors, I
am afraid, I cannot agree. This order was made on the basis of the agreement
between Seth and Misra and Arneja and at a time when they were having good
relations and in fact Seth was quite keen to have the shares even transferred
in the names of Misra and Arneja. Seth would have certainly voted in the
meeting of creditors at the behest of Misra and Arneja. Now that they have
fallen out, the above quoted order cannot stand.
When order dated April 10,
1986, was being made in CA No. 26 of 1985, it was submitted by Mr. Vohra,
counsel for Misra and Arneja, that in the scheme as proposed and filed in
court, an amendment should be made to the effect that the creditors would be paid
100% of the principal amount due to them plus such interest as the court might
propose. The court noted the statement of Mr. Vohra but observed that the
scheme which had been filed did not provide for payment of more than 50% and
that the scheme was to be put to the creditors and might be passed with or
without modifications. The court observed that at the meeting it was open to
anyone who was entitled to be present in the meeting to move for an amendment
of any of the terms of the arrangement proposed and that such an amendment, it
was suggested by Mr. Vohra, could be considered in the meeting. The same would,
therefore, apply in CAs Nos. 94 of 1987, 281 of 1987, both of Kelvinator of
India Ltd. and CA No. 300 of 1987 of Seth.
It may also be noted that
Kelvinator of India Ltd. also claimed to have purchased certain credits and
shares in the company and also wanted their transfer in its name., though no
specific prayer was made.
I will note that it was
also the contention of Mr. Chandrasekharan that the scheme of arrangement
propounded by Seth took into account transfer of shares by Seth to Misra and
Arneja and he, therefore, said that transfer of shares in the names of Misra
and Arneja could not be examined in isolation and that transfer of shares was interwoven
with the sanctioning of the scheme. I am not able to agree with his submission
in view of what I have discussed above.
I would, therefore, direct
as under:
(1) The official liquidator will substitute the names of
Misra and Arneja and their nominees as per the transfer deeds on record in
place of the members as per annexures A and B to the agreement dated November
28, 1984, in the register of members of the company subject, however, that
Misra will produce requisite permission from the Reserve Bank of India for his
being brought on record as a member of the company.
(2) Misra and Arneja will be treated as the creditors of the
company in place of those mentioned in annexure D to the aforesaid agreement as
well as in place of Punjab National Bank in respect of the debts as appearing
in the statement of affairs filed under section 454 of the Act.
(3) The members appearing in the list of members of the
company and the creditors as given in the statement of affairs and as amended
as per (1) and (2) above will be the members and creditors entitled to vote.
These lists of members and creditors shall be submitted by the official
liquidator to the chairman.
(4) Meetings of the members and shareholders of the company
for considering the scheme proposed by Seth will be held on July 10, 1987, and
in respect of the scheme proposed by Kelvinator of India Ltd. these meetings
will be held on July 11, 1987.
(5) Notices of the meetings to be sent to the shareholders
and creditors of the company shall be settled by the chairman/alternate
chairman with the Registry.
(6) Subject to the above directions,
other directions as given in the orders dated April 10, 1986, in CA No. 26 of
1985 and dated April 15, 1986, in CA No. 414 of 1985 as modified by order dated
May 5, 1986, shall remain the same.
(7) The chairman and the alternate
chairman shall respectively be paid a further sum of Rs. 1,000 and Rs. 500 in
respect of each of the four meetings for the work done by the mearlier for
taking steps in settling the lists of shareholders and creditors as per the
interim report dated July 12, 1986, of the chairman.
(8) A copy of these directions shall be
forwarded to the chairman/ alternate chairman by the Registry.
No
further orders are required. CAs Nos. 26 of 1985, 414 of 1985, 699 of 1985, 844
of 1985, 855 of 1985, 949 of 1985, 963 of 1985, 63 of 1986, 1818 of 1986, 94 of
1987, 158 of 1987, 279 of 1987, 281 of 1987 and 300 of 1987 stand disposed of.
[1987] 62 COMP. CAS. 683 (ALL)
HIGH COURT OF
v.
Swadeshi Mining and Manufacturing
Co. Ltd.
K.N. SINGH AND A. BANERJI, JJ.
SPECIAL APPEAL NO. 5 OF 1983
AUGUST 3, 1984
Sudhir Chandra for the
Appellant.
V. P. Singh and Rajaram
Agarwal for the Respondents.
A. Banerji, J.—This special appeal has been filed by M/s Swadeshi Polytex
Ltd. against the decision dated March 2, 1983, by the learned company judge
allowing company petition under section 155 of the Companies Act, 1956, and
directing the appellant (M/s. Swadeshi Polytex Ltd. hereinafter referred to as
"the Polytex") to correct its register of members by deleting the
names of the holders of the disputed 1,26,000 equity shares and in its place
substitute the name of the New Bank of India, Kanpur (respondent No. 2), within
a week and it was further directed that respondent No. 2 shall have voting
right in respect of the aforesaid equity shares.
M/s. Swadeshi Polytex Ltd.
is a company with its head office in
The dispute in this case
lies in a narrow compass and relates to the interpretation of the provisions of
sections 108A and 108E of the Companies Act, 1956 (hereinafter called "the
Act").
In this connection,
reference to the provisions of sections 108B, 108C 108F and 642 of the Act as
also to rules 3 and 4 of the Companies (Central Government's) General Rules and
Forms, 1956, and to paragraph 10 of Form 7C as well as the notes under
paragraph 20 of the said Form will be necessary.
Briefly stated, the
contention raised on behalf of the Polytex before us was that prior approval of
the Central Government had not been taken by the purchaser, viz., Swadeshi
Mining respondent No. 1, to acquire 1,26,000 equity shares as required under
section 108A of the Act. Consequently, the sale in favour of petitioner No. 1
was void, illegal and conferred no right, title or interest on the purchaser.
As such it invoked the imposition of penalty as provided under section 108F of
the Act. A further contention was that the forms set forth under the Companies
(Central Government's) General Rules and Forms, 1956, and, in particular, form
7C was not complete in all particulars and was liable to be rejected by the
Central Government for it did not give full details of the person (name,
address, etc.) from whom the shares were proposed to be acquired. Another
contention in this respect was that since the application for approval
submitted was deficient and as the deficiency was pointed out by the Central
Government to the intending purchaser, the time of sixty days laid down under
section 108E of the Act commenced to run from May 7, 1981, and had not expired
when the sale had been made in favour of the purchaser on June 30, 1981.
Reference in this regard was made to the notes under paragraph 20 of Form 7C.
In other words, the contention was that the presumption under section 108E was
not available to the petitioners since the period of 60 days had not expired
and the same could not be deemed to be a valid sale in favour of the purchaser.
Apart from the above questions, learned counsel for the petitioners raised two
other points. Firstly, that the Central Government was a necessary party in
this proceeding and secondly, the complete record of the case before the
Central Government was necessary to find out as to how the application made by
the purchaser had been dealt with. In this context, learned counsel urged that
the point had not been given up before the learned company judge at any stage
of the hearing.
In reply, learned counsel for
the respondent urged that the presumption under section 108E was complete
unless within a period of 60 days from the date of the receipt of the
application for permission under section 108A, the Central Government
communicated to the person by whom the request
was made, that the approval prayed for cannot be granted. He urged that there
was no communication within a period of 60 days or even thereafter by the
Central Government saying that the approval prayed for could not be granted. It
was also contended that the application was complete in all respects and the
applicant was nowhere required to furnish the name of the person who owned the
shares, for paragraph 10 of Form 7C only required the name, address, etc., of
the person "from whom the shares are proposed to be acquired". Since
the shares were to be acquired from the Tax Recovery Officer,
It is apparent from the
above that the principal question before us is whether the acquisition of
1,26,000 equity shares of the Polytex by the purchaser, respondent No. 1
(Swadeshi Mining) by sale from the Tax Recovery Officer was a valid sale.
In order to appreciate the
arguments raised at the Bar, it will be appropriate that we make reference to
the specific provisions of law to which our attention was drawn.
Section 108A which places restriction on the acquisition of shares in certain circumstances, runs as under:
"108A. Restriction on
the acquisition of shares.—(1) Except with the previous approval of the Central
Government, no individual, group, constituent of a group, firm, body corporate or
bodies corporate under the same management, shall jointly or severally acquire
or agree to acquire, whether in his or its own name or in the name of any other
person, any equity shares in a public company, or a private company which is a
subsidiary of a public company, if the total nominal value of the equity shares
intended to be so acquired exceeds, or would, together with the total nominal
value of any equity share already held in the company by such individual, firm,
group, constituent of a group, body corporate or bodies corporate under the
same management, exceeds twenty-five per cent of the paid-up equity share
capital of such company.
(2) Any person who acquires
any share in contravention of the provisions of sub-section (1), shall be
punishable with imprisonment for a term which may extend to three years, or
with fine which may extend to five thousand rupees, or with both".
There is a presumption
about the grant of the approval by the Central Government on an application
under section 108A if there is no refusal by
the Central Government within a specified period of time. Section 108E reads as
under:
"108E.
Time within which refusal to be communicated.—Every request made to the Central Government for according its approval
to the proposal for acquisition of any share referred to in section 108A or the
transfer of any share referred to in section 108C shall be presumed to have
been granted unless, within a period of sixty days from the date of receipt of
such request, the Central Government communicates to the person by whom the
request was made, that the approval prayed for cannot be granted".
Reference may also be made
to the provisions of section 108B which place restriction on the transfer of
equity shares by a body corporate or bodies corporate under the same management
holding ten percent or more of the nominal value of the subscribed equity share
capital of any other company on the transfer of one or more of such shares to
give intimation to the Central Government prior to such transfer. Sub-section
(2) lays down that if the Central Government is satisfied that as a result of
the proposed transfer of shares, a change in the composition of the board of
directors of the company is likely to take place and that such change is
prejudicial to the interests of the company or to public interest, it may
direct that such shares shall not be transferred. Sub-section (5) says that if
the Central Government does not make any direction as contained in sub-section
(2) within a period of sixty days, the provisions of sub-section (2) will not
be attracted.
Reference may also be made
to section 108C which places restriction on the transfer of shares of foreign
companies. This provision also requires previous approval of the Central
Government.
Section 108F provides
penalty for contravention of section 108A, 108B or 108C. It reads:
"(1) Every person who exercises any voting or other right in relation to any share acquired in contravention of the provisions of section 108A, section 108B or section 108C shall be punishable with imprisonment for a term which may extend to five years and shall also be liable to fine".
Sub-section (2) likewise
provides for punishment to every officer of the company who gives effect to any
voting or other right exercised in relation to any share acquired in
contravention of the provisions of section 108A, section 108B or section 108C
of the Act.
There is no dispute on the
fact that Swadeshi Cotton Mills is the holder of more than 25 percent equity
shares in Polytex. As a matter of fact, it is more than thirty percent It is
not disputed that Swadeshi Cotton Mills is a
holding company in relation to Swadeshi Mining. Swadeshi Mining, therefore,
applied for approval of the Central Government for the acquisition of shares
which were under attachment with the Tax Recovery Officer, Kanpur, and were for
sale.
On the question whether prior approval of the Central Government was necessary or not in the present case, an argument was raised by Mr. Rajaram Agarwal, appearing for respondent No. 1, that it was not really necessary as the acquisition of 1,26,000 equity shares did not alter the situation vis-a-vis the Swadeshi Cotton Mills, Kanpur, for the latter already held more than twenty-five percent equity share capital in the Polytex. In other words, he urged that the provisions of section 108A can be attracted only in a case where a holder of less than twenty-five percent of the equity share capital of the company acquires such shares to make its holding exceed twenty-five percent of the equity share capital in the company. This argument has, in our opinion, no merits. The provisions of section 108A make it obligatory for any person, group, constituent of a group, firm, body corporate or bodies corporate under the same management where they jointly or severally acquire or agree to acquire, whether in his or its own name or in the name of any other person, any equity shares in the public company, where the total nominal value of any equity share intended to be acquired exceeds, or would, together with the total nominal value of any equity share already held in such company, exceed twenty-five percent of the paid-up equity share capital of the company. It will thus be seen that if the acquisition is of a block of equity shares, which exceeds twenty-five percent of the total equity share capital of the company or where the holding of equity shares by a party would exceed twenty-five percent of the total equity share capital of the company by fresh acquisition, prior approval of the Central Government for such acquisition is necessary. The embargo is put on acquiring more than twenty-five percent of the equity share capital in the company unless previous approval has been obtained. Section 108A makes it clear that the restriction is on the acquisition of the equity share capital of a public company by any individual, group, constituent of a group, firm, body corporate or bodies corporate under the same management whether acting jointly or severally. They are restrained from acquiring equity shares where the total existing holding plus the intended acquisition would exceed twenty-five percent of the equity share capital in that company. Prior approval of the Central Government would become necessary in such a case.
As far as the facts of the
present case are concerned, there is no dispute now that an application was
necessary to be made for approval of the Central Government. An application was
made to the Central Government on March 12, 1981. According to the provisions
of section 108C, it was necessary for the Central Government to have intimated
within sixty days its refusal to grant the approval. It may be noticed that not
only had the refusal to be indicated within a period of sixty days but it had
to be communicated to the party within sixty days. Admittedly, no such
communication was sent by the Central Government in the present case.
Therefore, the acquisition could be made by purchase of the shares from the Tax
Recovery Officer after May 12, 1981.
In fact, the Swadeshi
Mining sent two letters thereafter to the Central Government for expediting the
grant of the approval for the acquisition of the shares. These letters are
dated March 20, 1981, and March 27, 1981. The letter dated March 20, 1981, was
replied to by a letter dated May 7, 1981. We will be referring to this letter a
little later but at present it would suffice to say that the entire premises of
the appellant's contention rests on this letter to urge that although there was
no direct refusal to grant the approval for the acquisition of shares, yet in view
of the Note underlined paragraph 20 of Form 7C, which is the pro forma of the
application for the acquisition of shares, under rules 3 and 4 of the Companies
(Central Government's) General Rules and Forms, 1956, made by the Central
Government in exercise of its powers under section 642 of the Act. The first
paragraph of the notes under paragraph 20 of the Form reads as follows:
"Notes:
If this application is incomplete in any respect, the deficiency will be pointed out to the applicant and the period of 60 days will count from the date from which such deficiency is set right".
The sheet-anchor of the
argument of learned counsel for the appellant was that by the letter dated May
7, 1981, the Central Government had asked for particulars about the owner of the
shares which were under attachment and sale by the Tax Recovery Officer.
Consequently, the application made by the Swadeshi Mining was deficient and as
such the period of sixty days commenced to run not from March 12, 1981, but
from May 7, 1981 and since the acquisition was made by sale in favour of
Swadeshi Mining by the Tax Recovery Officer on June 30, 1981, it was void as
the period of sixty days from May 7, 1981, had not expired. In other words, the
argument was that the presumption which is to be raised under section 108E of
the Act was not available to Swadeshi Mining and in any event not before July
7, 1981. Consequently, it was argued that the acquisition was contrary to law
and the petition under section 155 was misconceived and the decision of the
learned single judge allowing the application was bad in law.
It would now be appropriate
to quote in full the letter dated May 7, 1981, sent by the Central Government.
"No. 11/29/81 CL. VI,
Government of India,
Ministry of Law, Justice and Company Affairs, Department of Company Affairs, Shastri Bhawan, 5th Floor, 'A' Wing, Dr. R. P. Road, NewDelhi.
7-5-1981.
M/s. Swadeshi Mining &
Mfg. Co. Ltd.,
L-25, Connaught Circus,
New Delhi—110001.
Subject: Application under section
108A of the Companies Act, 1956.
Gentlemen,
With reference to your
letter dated March 20, 1981, on the subject noted above, I am directed to say
that you have stated in your letter dated March 12, 1981, that Tax Recovery
Officer, 'B' Range, Kanpur, has asked both the trusts to arrange for the sale
of shares by March 15, 1981, failing which he would sell the shares even below
quoted price. Since the said date, i.e., March 15, 1981, has already expired,
it may please be intimated whether the Tax Recovery Officer, 'B' Range, Kanpur,
has sold the shares under question; if so, the details thereof may be
furnished. In case the shares are still with the two trusts, it may be stated
whether the Tax Recovery Officer, 'B' Range, Kanpur, may have extended the period
for the sale of shares by the two trusts.
2. The names of trustees of the two trusts,
namely, A. M. Jaipuria Public Charitable Trust, Kanpur, and Jaidei Devi
Anandram Jaipuria Public Charitable Trust, Kanpur, may be furnished.
3. It may be confirmed that the shares will be
purchased at the market price prevailing at the stock exchange. It may be noted
that pending receipt of the above, your application under section 108A of the
Companies Act, 1956, has been closed.
Yours faithfully,
(S/d-) V. P. UPPAL,
Under Secretary to the
Government of India".
It would be seen that the
first paragraph only requires the information whether the Tax Recovery Officer,
'B' Range, Kanpur, has sold the shares under question and if so, the details
thereof to be furnished. In case the shares were not sold, intimation may be
given whether the Tax Recovery Officer had extended the period for the sale of
the shares of the two trusts. The
information sought by the Central Government did not have the effect of making the application by Swadeshi
Mining a deficient one. This enquiry was made since the sale was intended to be
effected on March 15, 1981. It is nowhere required in Form 7C to mention the
date by which the shares were to be sold or acquired. Consequently, the information
asked for by the Central Government could not render the application deficient.
Paragraph 2 of the above
letter asked that the names of the trustees of the two trusts be furnished. The
argument was that there was a deficiency in the application dated March 12,
1981, inasmuch as the names of the trustees of the two trusts had not been
mentioned. Emphasis was laid by learned counsel for the appellant that it was
necessary for the applicant, viz., Swadeshi Mining, to have given the names of
the trustees of the two trusts in their application dated March 12, 1981, as
the trustees really constituted to be the owners of the shares on behalf of the
trusts. In other words, the argument was that the names of the trustees were
necessarily to be mentioned in the application under section 108A and this not
having been done, there was a deficiency and as such the time had not begun to
run once the deficiency was pointed out by the Central Government,
On behalf of the
respondents, it was urged that furnishing of the names of the trustees was not
at all necessary under paragraph 10 of Form 7C. It did not require the names of
the persons who were the owners of the shares but required information of the
persons from whom the shares were to be acquired. Since the shares were to be
acquired from the Tax Recovery Officer, the particulars of the shares, names of
the two trusts and the particulars of the Tax Recovery Officer were mentioned
in the application made on March 12, 1981.
Paragraph 10 of Form 7C
reads as follows:
"Full details of the persons (name, address, etc.) from whom the shares are proposed to be acquired".
This shows that the details
of the persons from whom the shares are proposed to be acquired are to be
mentioned in the application under section 108A. The term "full details of
the persons" used in paragraph 10 above requires the giving of such
persons' names and addresses. Paragraph 10 nowhere mentioned that the names of
the owners of the shares have to be mentioned. Paragraph 10 does not require
the applicant to mention the name of the person or persons in whose name the
shares were registered with the company even. We, therefore, do not find any
substance in the contention that it was necessary to mention the names of the
trustees in the application under section 108A. The shares were not being
acquired from the trustees. The shares were under attachment and sale in lieu of arrears of income-tax and wealth-tax dues and
were to be sold by the Tax Recovery Officer. None of the paragraphs of Form 7C
requires the disclosure of the names or other particulars of the owners of the
shares. It is not disputed that the two trusts mentioned above were the owners
of the aforementioned 1,26,000 equity shares. The relevant particulars were
disclosed in the application under section 108A. It was, therefore, not
necessary to disclose the names of the trustees of these two trusts in the
application under section 108A. Rule 3 of the Companies (Central Government's)
General Rules and Forms, 1956, reads:
"The Forms set forth in annexure A, or Forms as near thereto as circumstances admit, shall be used in all matters to which the Forms relate".
It is nobody's case that
the application made by the petitioners in the company petition under section
108A dated March 12, 1981, was not in consonance with Form 7C prescribed. All
the required particulars were there. Thus, it cannot be said that there was a
deficiency in the application made to the Central Government for approval under
section 108A. If the Central Government requires any additional information, it
can always be furnished, as it was done in the present case, promptly. However,
since there was no deficiency in the application, there was no question of
extending the period of sixty days till the deficiency was set right. In other words,
the notes under paragraph 20 of Form 7C, quoted above, would have no
application unless the Central Government had pointed out a deficiency in the
application. The letter of the Central Government dated May 7, 1981, does not
say that the nondisclosure of the names of the trustees of the two trusts was a
deficiency. We are not able to persuade ourselves to accept the contention of
learned counsel for the appellant that paragraph 2 of the letter of the Central
Government dated May 7, 1981, had the effect of pointing out the deficiency in
the application. Had it been so, the Central Government would have stated so
clearly. Since the above information was not required to be furnished in the
original application for approval, it could not constitute a deficiency.
However, it would be open to question whether it constituted a deficiency or
not, in case it was so pointed out by the Central Government. In the present
case, there is no indication by the Central Government in their letter dated
May 7, 1981, that there was any deficiency. It is quite open to the Central
Government to require additional information in a particular case but that
would not render the application deficient if it is not required under the law
to be furnished.
In this context, we may now
refer to the three statements made in Parliament by the Minister concerned in
regard to queries made by the Hon'ble Members
of Parliament. Great emphasis was laid on the fact that the matter was pending
for the consideration of the Government and had not been disposed of and as
such the period of sixty days had not even begun to run. We are not impressed
by this line of argument. We may now briefly refer to the statements made in
Parliament. The first statement was made on December 8, 1981, in response to unstarred
question No. 2545. The Hon'ble Minister of Law, Justice and Company Affairs,
stated that while the application of the company was still under examination,
it was learnt from the applicant company and from the Tax Recovery Officer (b),
Income-tax, Kanpur, with whom the aforesaid shares were under attachment, that
the said shares have been sold to the applicant company at the rate of Rs. 19
per share on June 30, 1981, through a registered share and stock broker at
Calcutta. Messrs Swadeshi Mining & Mfg. Co. Ltd. have thus acquired the
aforesaid shares by way of purchases without having obtained prior approval
under section 108A of the Companies Act. The question regarding penal action,
if any, against the company for contravention of the provisions of the
Companies Act is under examination.
The next statement made on the floor of the House is dated April 8, 1982, in reply to unstarred question No. 8717. The question is also relevant. Three Hon'ble Members of Parliament had asked:
"Will the Minister of Law, Justice and Company Affairs, be pleased to refer to reply given to USQ No. 2545 of December 8, 1981, regarding representation of shareholders of Swadeshi Polytex and state:
(a) Whether the
examination has been completed;
(b) If so, the
results thereof; and
(c) Action Government
proposes to take against the firm?"
The answer was given by the
Minister of State in the Ministry of Law, Justice and Company Affairs.
"Parts (a), (b) and
(c): The question regarding penal action, if any, against the company, namely,
M/s. Swadeshi Mining & Mfg. Company Ltd., for alleged contravention of the
provisions of section 108A of the Companies Act, 1956, is still under
examination".
The third time the matter
figured in the Lok Sabha was on August 3, 1982. In reply to the question as to
the present state of transfer of 1,26,000 equity shares of applicant in the
name of Swadeshi Mining, the Hon'ble Minister of Law, Justice and Company
Affairs, stated that a petition under section 155 of the Companies Act was
filed by the Swadeshi Mining in the Allahabad High Court and was pending before
the court. Further, in reply to the question as to the action being initiated
against the Swadeshi Mining, the Hon'ble Minister stated:
"Since the petition under section 155 of the Companies Act, 1956, is pending before the Allahabad High Court, the Government is awaiting the result of those proceedings".
It would thus be seen that
the answers of the Hon'ble Minister on the floor of Parliament on April 20,
1982, and August 3, 1982, pertained to the action proposed to be taken against
the Swadeshi Mining for contravention of the provisions of law and the
Government stated that it was still under consideration. The question of taking
action against the Swadeshi Mining would arise under section 108F of the Act
provided there was a contravention of the provisions of section 108A or 108C in
the present case.
The answer given by the Government on September 8, 1981, which has been quoted in extenso above, however, contains one sentence which needs further reference. "M/s. Swadeshi Mining & Mfg. Company have thus acquired the aforesaid shares by way of purchases without having obtained prior approval under section 108A of the Companies Act". Great emphasis was laid on the above sentence by learned counsel for the appellant to say that the shares had been acquired by the Swadeshi Mining without having obtained prior approval of the Central Government. The only reason for coming to this conclusion is based on the ground that the application of the company was still under examination when the shares were sold on June 30, 1981. This statement nowhere says that the application made by the Swadeshi Mining was deficient in any way or defective or that the Central Government had withheld giving of approval as required under section 108C. Merely because the matter was under examination and continued to be so would not render the acquisition invalid. We have examined the matter in some detail above and it has been seen that there would be a presumption of approval in case the application under section 108A was not refused by the Central Government and such refusal had to be communicated within sixty days of the making of the application. Admittedly, there was no refusal by the Central Government of the approval sought by the Swadeshi Mining. The Central Government, if it so wishes, may allow an application for approval of acquisition by a specific order and may keep silent for a period of sixty days which would also amount to an approval in view of the provisions of section 108E. Therefore, if a matter is under the examination of the Central Government even after the expiry of the sixty days, it would not override the provisions of section 108E of the Act. The provisions of section 108E are clear. The law provides for communicating refusal of the grant of approval by the Central Government and where it is not so done within 60 days of the making of the application, there would be a presumption of the approval having been granted. Since there is nothing on record to show that the Central Government had either refused the grant of approval or pointed out any deficiency in the application made to the Central Government, the approval would be presumed to be there after the expiry of sixty days. The provisions of section 108E lay down a salutary rule of law. It fixes a time-limit within which the Central Government must act if it is satisfied that the approval is not to be granted. One cannot go on waiting for the approval of the Central Government in respect of acquisition of shares in a public company, which is a negotiable instrument, indefinitely. The Central Government had to act promptly so that it could, if it was not satisfied with the application, communicate its refusal within sixty days.
In the present case, it is
apparent that the company made the application on March 12, 1981, and followed
it with three applications for expediting the matter, viz., by the applications
dated March 20, 1981, March 27, 1981, and May 8, 1981. The company also
addressed a letter dated May 11, 1981, in which additional information sought
for in the letter dated May 7, 1981, by the Central Government was replied to.
In this letter also, the Swadeshi Mining had asked for according the requisite
approval of the purchase of the shares. It seems to us that the Central
Government acted sluggishly in this matter. Consequently, the law must take its
own course. Hence, we are of the opinion that the approval would be presumed to
be there in view of the provisions of section 108E of the Act since the refusal
to grant approval had not been made or communicated to the applicant nor would
the time be extended as no deficiency in the application had been pointed out.
In view of the above, it is
not necessary to advert to the argument raised by learned counsel for the
respondent regarding non-feasibility of supplying names of owners of shares
where several successive transactions have been made through blank transfer
forms. In the present case, the facts are clear. The fact that the shares were
attached and were for sale by the Tax Recovery Officer in realisation of
arrears of income-tax and wealth-tax dues was all known and had been mentioned.
Reference may be made in this context to the Income-tax (Certificate
Proceedings) Rules, 1962.
Rule 37 of the above Rules
refers to transfer of negotiable instruments and shares by the Tax Recovery
Officer and throws light on the execution of a document of sale by the Tax
Recovery Officer. The relevant provision reads as follows:
"(1)
Where the execution of a document or the endorsement of the party in whose name
a negotiable instrument or a share in a corporation is standing is required to
transfer such negotiable instrument or share to a person who has purchased it under a sale under the Second
Schedule, the Tax Recovery Officer may execute such document or make such
endorsement as may be necessary and such execution or endorsement shall have
the same effect as an execution or endorsement by the party".
It is apparent from the
above that when the Tax Recovery Officer is required to transfer such
negotiable instrument or share to a person who has purchased it, the Tax
Recovery Officer may execute such document or make such endorsement as required
and in that event the execution and the endorsement made shall have the same
effect as an execution or endorsement by the party. Consequently, it can be
said that the disputed shares were being acquired in the present case from the
Tax Recovery Officer. He was competent to execute the document of sale.
Paragraph 10 of Form 7C of the Companies (Central Government's) General Rules
and Forms, 1956, required the name of the party from whom the shares were being
acquired and not the name of the owner. Since the shares had been attached for
sale by the Tax Recovery Officer in the course of proceedings for recovery of
arrears of income-tax and wealth-tax dues, the Tax Recovery Officer was
competent to execute a sale deed in favour of the petitioner, Swadeshi Mining.
The shares were, therefore, being acquired from the Tax Recovery Officer in
this case.
Another argument made on
behalf of the appellant which has to be taken notice of is whether the Central
Government is a necessary party and the record of the case following the
application by the Swadeshi Mining was necessary for a proper disposal of the
matter in this court. In our opinion, the Central Government was not a
necessary party at all. No relief was being asked for against the Central
Government. Section 155 envisages orders being passed against the company whose
shares are involved. The Central Government has nothing to do with the same. If
an application is made to a company to register a particular share and the
company refuses to do so, the remedy of the aggrieved party is to apply to the
High Court under section 155, and the Central Government has no role to play in
such an application. Consequently, the Central Government was not a necessary
party.
It was then contended that
if it was not a necessary party, it was a proper party. We fail to appreciate
how the Central Government would be a proper party. A proper party is one whose
presence is necessary to enable the court to make a final and complete
adjudication. In the present case, the presence of the Central Government in
the proceedings under section 155 was, in our opinion, not required. What was
then argued was that in order to call for the record from the Central
Government in the application made under section 108A of the Act, the Central
Government would be a proper party. The question of asking for the record of
the case was in the discretion of the court. The parties having filed all
relevant and necessary correspondence in the matter and nothing having been
brought to our notice that there were some other orders passed by the Central Government
on the application under section 108A, we fail to understand how it was
necessary to send for the entire file pertaining to the application under
section 108A. It may be mentioned at this stage that the learned company judge
has clearly stated that the request for sending for the record from the Central
Government was not pressed. Learned counsel for the appellant emphasised that
at no stage of the hearing, the prayer was given up. Learned counsel for the
respondent, on the other hand, urged that it was so done during the course of
arguments. We are mentioning this for this was the stand of the respective
parties before us. However, we are not impressed. In our opinion, when all the
relevant papers were before the court and since none of the parties before us
urged that there were some other specific papers, we do not see the relevance
in summoning the record for the purpose of a fishing and roving enquiry.
Whenever the record of a case or proceeding is to be sent for, a case has to be
made out. If there were other papers, it should have been specified. The prayer
for sending for the record from the Central Government was repeated before us,
but in view of what has been stated above, we see no good reason to do so.
We have considered the
matter carefully and we have come to the conclusion that the arguments raised
by learned counsel before us have no merits and the appeal must fail.
Consequently, we uphold the judgment of the learned company judge for the
reasons given above and dismiss the special appeal with costs.
We further direct that the
Swadeshi Polytex Ltd., the appellant, shall correct its register of members by
deleting the names of the present holders of the disputed 1,26,000 equity
shares and in its place substitute the name of respondent No. 2, New Bank of
India, Kanpur, within a week from the date of the receipt of the certified copy
of this order.
Mr. Raja Ram Agarwala, learned counsel for the
petitioner-respondent, states that the extraordinary general meeting is
scheduled to be held on August 14, 1984, and as such the transferee should be
allowed to vote at the said meeting. Since we have already upheld the claim of
the petitioner, we direct that the New Bank of
[1995] 6 SCL 173 (SC)
SUPREME COURT OF
v.
Smt. Saroj Maloo
DR. A.S. ANAND AND
G.T. NANAVATI, JJ.
CIVIL APPEAL NOS. 8432-33 OF 1995
[ARISING OUT OF SLP (CIVIL) NOS. 10546-47 OF 1992]
SEPTEMBER 20, 1995
Section 108, read with sections 25 and 27, of the Companies Act, 1956 - Transfer/transmission of shares - Whether there is distinction in matter of transfer of share or other interest, between a company limited by shares and company limited by guarantee and whereas in case of former it is Table A of Schedule I which is applicable, in case of latter it is Table 'C which will apply - Held, yes
The
appellant, a member of Stock Exchange which was a company registered under
section 25 and limited by guarantee, lodged with the stock exchange an
instrument of transfer of his membership rights in favour of the respondent.
The Stock Exchange refused to transfer membership on the ground that there was
no provision for transfer in its articles of association. The High Court held
that no distinction could be made in the matter of shares or other interest
between company limited by shares and company limited by guarantee and there
being no bar of transfer by nomination of other interest in the article of
association of the Stock Exchange to transfer membership, the transfer by the
appellant could not be refused.
Section
28 provides that the articles of association of a company limited by shares may
adopt all or any of the regulations contained in Table A in Schedule I. It
further provides that in the case of any such company which is registered after
the commencement of the Act if articles are not registered or if articles are
registered insofar as articles do not exclude or modify the regulations
contained in Table A those regulations shall insofar as applicable be the
regulations of the company in the same manner and to the same extent as if they
were contained in duly registered articles. In respect of other companies
section 29 provides that the articles of association of such company shall be in such one of the forms in Tables C D and
E in Schedule I as may be applicable or in a form as near thereto as
circumstances admit. It further provides that nothing contained in that section
shall be deemed to prevent a company from including any additional matters in
its articles insofar as they are not inconsistent with the provisions contained
in the form in any of the Tables C, D and E adopted by the company.
In this case, it was not
disputed that Table C would be applicable. If Tables A and C are compared it
becomes apparent that there are material differences between the two. These
differences and their effects had not been considered by the High Court. The
High Court had also not considered who can be a member of a company limited by
guarantee and of the nature and type like the stock exchange and whether that
would make any difference in the matter of transfer of other interest of a
member in such a company. It was submitted that for becoming a member of a
company like the stock exchange in the instant case certain qualifications are
necessary and that would, by necessary implication, even in absence of articles
of association, putting restrictions on transfer of membership by nomination.
The High Court should have examined all these relevant aspects and ought not to
have disposed of the matter by merely observing that no distinction can be made
in the matter of transfer of share or other interest between a company limited
by shares and a company limited by guarantee. Accordingly, the judgment of the
High Court was set aside and the matter remanded for fresh disposal.
V.B. Rangaraj v. V.B.
Gopalkrishnan 1992 (1) SCC 160.
Nanavati, J. - Leave
granted.
2. These two appeals are filed against the judgment and order
dated 28-4-1992 passed in Company Appeal No. 1 of 1991 and the order dated
4-8-1992 passed in Civil Review No. 55 of 1992 by the Patna High Court.
3. The Maghadh Stock
Exchange Association ('MSEA') is registered as a company under section 25 of
the Companies Act, 1956 ('the Act'). It is a company limited by guarantee and
not having a share capital. Appellant, Narendera Kumar Agarwal, lodged with
MSEA on 9-2-1989 an instrument of transfer/nomination for transferring his
interest as a member in the company in favour of respondent No. 1, Smt. Saroj
Maloo. On 10-8-1989 she was informed by MSEA that transfer of membership by
nomination in her favour was not possible in absence of any provision to that
effect in its articles of association. Aggrieved by the refusal Smt. Saroj
Maloo filed an appeal under section 111 of the Act to the Company Law Board
(the Board). The stand taken by MSEA before the Board was that in the articles
of association there was no provision regarding nomination of membership
leading to transfer of the same in favour of nominee, prior to June 1989 and
that in case of a company limited by guarantee without share capital like MSEA
membership cannot be transferred by nomination until a clause providing for
nomination is incorporated in its articles of association. It was also
contended that a request for nomination could not have been received and
considered till a provision in that behalf was incorporated in the articles of
association. Even after incorporation of article 27A of the Articles of
Association, the request to transfer could not be granted as it did not fulfil
the requirements prescribed by that provision. The action of MSEA was also
sought to be supported on the ground that Shri Narendera Kumar Agarwal had
subsequently cancelled his request contained in his letter dated 6-2-1989 to
transfer his interest in favour of Smt. Saroj Maloo. The Board was of the view
that if there is no provision for transfer of other interest in the articles of
association of a company limited by guarantee and having no share capital then
the member cannot transfer his interest to a third person. The Board held that
in absence of such a provision and because Smt. Saroj Maloo failed to establish
her case of proper lodgement of transfer of other interest of the member as
required by the amended article 27A the action of MSEA was justified. It,
therefore, dismissed her application.
4. She preferred an appeal before the Patna High Court
against the said order passed by the Board. The High Court held that no
distinction can be made between transfer of share of a limited company limited
by shares and transfer of other interest of a member in a company limited by
guarantee. Following the decision of this Court in V.B. Rangaraj v. V.B.
Gopalkrishnan 1992 (1) SCC 160 wherein it is held that the only restriction of
the transfer of the shares of the company is as laid down in its articles of
association and a restriction which is not specified in the article is not
binding either on the company or on the shareholders, the High Court held that
as there was no bar of transfer by nomination of other interest in the articles
of association of MSEA, refusal by MSEA was not justified and legal. It also
held that subsequent incorporation of article 27A in the articles cannot
justify the action of the MSEA. It, therefore, allowed the appeal and directed
MSEA to transfer the interest of Narendera Kumar Agrawal in the company in
favour of Smt. Saroj Maloo. While doing so, the High Court observed that it has
proceeded only on the basis that there was no such bar for transfer when the
application was made.
5. It was contended on
behalf of the appellant that the High Court did not consider all the relevant
aspects before directing MSEA to register the transfer. It was submitted that
though other interest of member in a company like the shares is a movable
property and transferable the transfer can be made in the manner provided by
the articles of association. The learned counsel appearing for MSEA also submitted that
if the High Court had carefully examined the articles of association of MSEA
then it would have noticed that it does contain restrictions with respect to
transfer of membership.
6. Section 28 of the Act
provides that the articles of association of a company limited by shares may
adopt all or any of the regulations contained in Table A in Schedule I. It
further provides that in the case of any such company which is registered after
the commencement of the Act if articles are not registered or if articles are
registered insofar as articles do not exclude or modify the regulations
contained in Table A those regulations shall insofar as applicable be the
regulations of the company in the same manner and to the same extent as if they
were contained in duly registered articles. In respect of other companies
section 29 of the Act provides that the articles of association of such company
shall be in such one of the forms in Tables C, D and E in Schedule I as may be
applicable or in a form as near thereto as circumstances admit. It further
provides that nothing contained in that section shall be deemed to prevent a
company from including any additional matters in its articles insofar as they
are not inconsistent with the provisions contained in the form in any of the
Tables C, D and E adopted by the company. In this case, it is not disputed that
Table C will be applicable. If Tables A and C are compared it becomes apparent
that there are material differences between the two. These differences and
their effects have not been considered by the High Court. The High Court has
also not considered who can be a member of a company limited by guarantee and
of the nature and type like MSEA and whether that would make any difference in
the matter of transfer of other interest of a member in such a company. It was
submitted that for becoming a member of a company like MSEA certain qualifications are necessary and that would by
necessary implication, even in absence of articles of association, put
restrictions on transfer of membership by nomination.
7. All the relevant material
is not before us and, therefore, we do not think it proper to express any
opinion on the merits of the controversy raised before us. We are of the opinion
that the High Court should have examined all these relevant aspects and ought
not to have disposed of the matter by merely observing that no distinction can
be made in the matter of transfer of share or other interest between a company
limited by shares and a company limited by guarantee. We, therefore, set aside
the judgment and order passed by the High Court in Company Appeal No. 1 of 1991
and in Civil Review No. 55 of 1992 and remit the matter back to the High Court
for deciding the appeal afresh after hearing both the sides and considering all
the relevant aspects. It is clarified that it will also be open to the parties
to raise their contentions regarding fulfilment of the requirements of section
108 of the Act. The appeals are disposed of accordingly. There shall be no
order as to costs.
[1997] 88 Comp. Cas
750 (SC)
Supreme
Court of
v.
Mrs. Surjeet Malhan
K.
RAMASWAMY AND G.T. NANAVATI JJ.
CIVIL APPEALS NOS. 737-738 OF 1997
FEBRUARY 3, 1997
P.N.
Lekhi, R.K. Chadha and Praveen Jain for the
Appellant.
Soli
J. Sorabjee, Ms. Suruchi Agarwal and Mrs. Pratima Malhotra for the Respondent.
Leave
granted. We have heard learned counsel on both sides.
These
appeals by special leave arise from the judgment of the Division Bench of the
High Court of Himachal Pradesh, made on November 14, 1996, in R.F.A. Nos. 230
and 231 of 1985.
The
admitted position is that the respondents, Mrs. Surjeet Malhan and Mr. B.K.
Malhan, wife and husband respectively, laid two suits for declaration and
permanent and mandatory injunction. The learned single judge of the High Court
dismissed the suits. But on appeal, the Division Bench has decreed the suits.
Thus, these appeals by special leave.
The
first respondent, Mrs. Surjeet Malhan, held 1,500 shares in total-900 in her
name and 600 in the name of other relatives—and 10 preferential shares. The
second respondent, B.K. Malhan, had held 2,230 ordinary shares and 64
preferential shares. It would appear that there was an agreement between B.K.
Malhan and Shri R.D. Bhagat, the appellant for transfer of the shares and
completion of the transaction to put on rails the company which was running in
losses. It would appear that as per the agreement, subsequent transactions were
to be completed and in furtherance thereof, it appears that the shares,
admittedly, were entrusted to Mr. Bhagat with a blank transfer form.
Thereafter, disputes arose between them. In consequence, the suits came to be
laid by the respondents against the appellants.
The
principal contention raised by Shri P.N. Lekhi, learned senior counsel for the
appellant, is that Mrs. Malhan had admitted in her evidence that her husband
had delivered her shares to Bhagat and that she never objected to the transfer
and that, therefore, there was an implied consent to the transfer of her shares
in favour of Bhagat. Equally, it is contended that when B.K. Malhan had
transferred the shares, though they were not registered with the previous
consent of the board of directors and they were not duly registered in the
register maintained by the Registrar in that behalf, there was a complete
transaction; the Division Bench, therefore, is not right in reversing the
judgment of the single judge. We find no force in the contentions.
There
should be consensus ad idem for a concluded contract and it is seen that
section 25(1) of the Contract Act contemplates that when a transfer is without
consideration, it is a void contract. It is an admitted position that there is
no concluded contract between Smt. Surjeet and Bhagat. The acquiescence did not
amount to consent unless Smt. Surjeet Malhan expressly authorised her husband
to transfer her shares. The transfer as contemplated in this case is only for a
sum of Re. 1. As a consequence, in the eye of law, there is no consideration
and, therefore, the transfer agreement is void. The question then is: whether
the wife had consented to the transfer? It is an admitted position that she had
not given authority by any letter in writing or otherwise to her husband to
transfer her shares in favour of Mr. Bhagat. Shri Lekhi sought to rely upon a
judgment of this court in Vasudev Ramchandra Shelat v. Pranlal Jayanand Thakar
[1974] 2 SCC 323 ; [1975] 45 Comp Cas 43 (SC) in which the Privy Council
judgment rendered in Maneckji Pestonji Barucha v. Wadilal Sarabhai and Co., AIR
1926 PC 28; 53 IA 92 was approved of. He contended that once the shares with
blank transfer forms were entrusted, the contract is complete and, therefore,
there is a concluded contract between Bhagat and the respondents. We find no
force in the contention. The transaction was between the broker and the
purchaser. After the broker purchased the shares on behalf of the company with
blank transfer forms, the shares were entrusted. It was, therefore, concluded
that the moment the shares were entrusted, being movable property, the contract
was complete and, therefore, it was a valid transfer. In this case, there was
no direct transaction between Mrs. Surjeet Malhan and Mr. Bhagat. It is not
even the case of the appellant that Mr. Malhan had been authorised to entrust
those shares and blank transfer forms to Bhagat. Under these circumstances,
without any specific authority by the owner of the shares, i.e., Mrs. Surjeet
Malhan in favour of any third party, including her husband, he gets no right to
transfer her shares; nor does Bhagat get any right and title in the shares held
by Mrs. Malhan. Even the judgment cited by Shri Lekhi in Balkrishan Gupta v.
Swadeshi Polytex Ltd. [1985] 58 Comp Cas 563 does not help the appellants. In
that case, the question was whether the appellant was a shareholder. This court
relying upon the concept of "ownership of right" discussed in Dais on
Jurisprudence held that (at page 578): "an owner may be divested of his
claims, etc., arising from the right owned to such an extent that he may be
left with no immediate practical benefit. He remains the owner nonetheless
because his interest will outlast that of other persons in the thing owned. The
owner possesses that right which ultimately enables him to enjoy all rights in
the thing owned by attracting towards himself those rights in the thing owned
which for the time being belong to others, by getting rid of the corresponding
burdens." In that case, similar to transfer of shares without being
registered in the company, it was held that he was holder of the shares. The
ratio therein also has no application to the facts in this case. Accordingly,
we hold that the transfer of shares held by Mrs. Malhan in favour of the
appellant is invalid in law.
The
next question is: whether the transfer of the shares held by Mr. B.K. Malhan is
valid in law? In that behalf clause (8) of the articles of association is relevant.
It is now a well-settled legal position that the articles of association of a
private company are a contract between the parties. Clause (8) reads that
"no transfer of any share in the capital of the company shall be made or
registered without the previous sanction of the directors ..." It is an
admitted position that no previous sanction has been obtained from the
directors for transfer of the shares held by Mr. Malhan. Shri Lekhi contends
that Mr. Malhan being the only director, since his father had already resigned
and he had entrusted the shares to the appellant, Bhagat, there is a
transfer in the eye of law. We are unable to agree with learned counsel. The
concept of previous sanction of the directors connotes that there should be a
written resolution accepting the transfer from Mr. Malhan in favour of Bhagat
and such previous sanction should precede the handing over of the shares. In
this case, such an action was not done and, therefore, even the transfer of the
shares held by Mr. Malhan in favour of the appellant is not valid in law. The
Division Bench of the High Court, therefore, was right in granting the decree
as prayed for.
The
appeals are accordingly dismissed, but, in the circumstances, without costs.
[1986] 60 COMP. CAS. 28 (
HIGH COURT OF
v.
T.P. Khaitan
D. R. KHANNA J.
DECEMBER 6, 1983
P.
C. Khanan, for the Applicant.
Krishan
Kumar for the Respondent.
D.
R. Khanna J.—Technically
speaking, this petition moved under section 403 of the Companies Act, 1956, by
one Ganesh Flour Mills Co. Ltd., has become infructuous inasmuch as the relief
sought for cannot any longer be granted. That relief claimed was that the
Company Law Board should be restrained from
proceeding with appeals Nos. 1 to 12 of 1982 filed before it under section 111
of the Companies Act with regard to the transfer of certain shares. The Company
Law Board has already disposed of those appeals and allowed them on July 13,
1983. Thereby the appellants before the Board, who were the transferees of
certain shares, were made entitled to be registered as shareholders on the
basis of those transfers. The opposition by the company to their transfer was
negatived. The company then filed a writ petition against that decision of the
Company Law Board, assailing the same on various grounds, but without success.
The writ was dismissed on November 22, 1983.
There is thus no further
relief which can be granted to the company under the present application. Mr.
Khanna, however, appearing for the company, has attempted to bring out a cobweb
of problems which are likely to arise as a result of the order of the Company
Law Board. According to him, the motive behind the transfer of shares is not
their acquisition simpliciter but to capture the company and take over its
management. This, it is urged, would be prejudicial to the public interest or
the interest of the company's affairs.
Since the controversy has
been raised by Mr. Khanna, it would be helpful here to mention the background.
Ganesh Flour Mills Co. Ltd. is having two vegetable ghee factories, one at
Since the public demand for
vegetable ghee was increasing, the Government stepped in on November 3, 1972,
under the Industries (Development and Regulation) Act. Certain authorised
persons under that Act took over the management of the company from the earlier
board of management and actively made efforts to rehabilitate it. According to
Mr. Khanna, substantial funds were made available by the government bodies,
with the result that the two vegetable ghee factories have started working and
various liabilities discharged. Still there are, however, stated to be
liabilities worth about rupees 6 crores, one-half of which are due to the
Income-tax Department. Other substantial liabilities are due to the Morarka
group on the basis of debentures worth rupees 95 lakhs which were issued in or
about 1968, and which were pledged with the Morarkas. Considerable interest has
already accrued on them. Mr. Khanna, however, states that he has mentioned
these liabilities not as a matter of admission, but as a narrative of the
difficult financial position through which the company has been passing.
The company continues to be
under the management of persons authorised under the Industrial (Development
and Regulation) Act, and it is this body which Mr. Khanna is at present
representing. The maximum period for which the notification under that
enactment can remain operative is said to be 17 years. However, Mr. Khanna
states that there is every likelihood of the company being nationalised
shortly. The Central Government, it is stated, has allowed increase in
production capacity of vegetable factories, and large amounts for that purpose
are being invested. In this manner, the company, it is stated, would definitely
take a turn for the better.
What has resulted in the
present litigation is the purchase of a number of shares of this company by one
Mr. Khaitan who happens to be the managing director of the Amrit Vanaspati
Company Ltd. and certain employees of that company. The shares so purchased
total about 7,750. This purchase was effected in 1976. Out of them, 1,047
shares have already been registered in the names of the transferees, while the
remaining have still to be registered. The company is resisting their registration.
It is alleged that by these purchases, the Khaitan group would start owning
about 6% shares in this company, and would thus be able to have substantial say
in the management. Since the Khaitan group is also interested in a rival
business known as Amrit Vanaspati Co., there is every likelihood of the affairs
of the present company being run to its detriment and to the benefit of Amrit
Vanaspati Company.
Against the denial of
registration of the remaining shares, the transferees moved an appeal before the
Company Law Board under section 111 of the Companies Act. They, at the same
time, applied under section 155 of the Companies Act before the company court.
The company, however, opposed the continuance of the two proceedings at the
same time. Before the Company Law Board, opposition was raised to the
maintainability of the appeals there, with the result that those appeals were
disallowed on the simple ground that the petitions under section 155 before the
company court were pending. When the proceedings under section 155 were later
taken up, the company again raised objections to their being held on the ground
that the proper remedy appeared to be to file appeals before the Company Law
Board. The transferees were then permitted by Kirpal J. on November 9, 1981, to
withdraw those petitions under section 155 leaving them free to move appeals
before the Company Law Board afresh. It was also observed that a sympathetic
view could be taken to the limitation aspect because of the said circumstances.
It was then that the
appeals were again filed before the Company Law Board which have now been
allowed, and the company's writ petition against that allowance has been
dismissed. The company, however, it seems, is not getting reconciled to the
situation, and continues to thwart the registration of the transfer of shares.
I am afraid, this cannot be allowed. The transferees have validly purchased the
shares of the company in open market, and this is an incident of any public
limited company that its shares are open to transfer to any person who may like
to purchase them. A public company cannot be treated for good as the vested
hold of the persons who once happened to be the shareholders.
As regards the contention that
the Khaitan group is likely to take over the management of the company, it is
not disputed that the shares so purchased by them would not be more than 6%.
That should not alarm the rest of the 94% shareholders, and they can always
assert their rights in case any acts detrimental to or prejudicial to the
affairs of the company are attempted to be enacted. Moreover, Mr. Krishan
Kumar, appearing for the transferees, has made no secret that these transferees
are not too keen to retain the shares, and that if the company or anybody wants
to purchase those shares at the present market value, they are ready to
transfer them. They deny any motivation to capture the present company.
The Company Court cannot
look on patronisingly at the tendency displayed by managements of the companies
or their shareholders to set at naught the too well-recognised concept of
transferability of shares inherent in the Company Law and accepted all over the
world. A public company cannot be relegated to the position of a personal or family
affair. If they want to enjoy that privilege, they are at liberty to operate
individually and form firms. In that case, there is no question of their
availing of the benefit of limited liability appurtenant to a limited company.
If however, recourse to incorporation of a company is resorted to, then the
personal or family interest becomes foreign and wholly irrelevant. The position
has then to be singularly looked at from the angle of rights and duties of a
shareholder. The shareholding of such person, whether large or small, is always
subject to the incidence of transfer. No curbs or fetters can be entertained or
imposed in order to protect the vested interest or to perpetrate the hold of
individuals or families over the affairs.
Similarly, the distinction
between a private limited company and a public limited company is marked and
real. In the case of the former, a family or other private group can confine
the shareholdings to themselves or render their transfer subject to their
approval. In the case of a public limited company, however, when the public at
large is invited to subscribe to the shares, and the benefit thereof is availed
of by the company, it cannot still claim to retain the complexion of being the
bastion or domain of a limited group where any instrusion by outsiders in the
form of acquisition of shares is resisted and monopolistic vested defences set
up. The basic character of a public limited company that any member of the
public is entitled to subscribe to its shares remains, and must be upheld to
the exclusion of any individuals or group interests. The approach in this
matter has not to be allowed to be swayed by likes and dislikes of individuals
or other considerations. That would be like placing momentary strains of
expediency on the too well recognised concepts of a public limited company. It
is futile to say that the sponsors of the company must in perpetuity continue
to have a hold. Rather it is more the investment of the public money in the
form of shares which ushers in the growth and development of the company. For
the managerial capacities, the persons concerned are duly paid their
emoluments, and they are not essentially removed or themselves leave on mere
change in the share structure of the company. Moreover, those who continue to
retain the shares still have a say in its affairs and profits commensurate with
their holdings.
The result, therefore, is
that thå application is dismissed.
[1935] 5 COMP. CAS. 472 (CD)
CHANCERY DIVISION
v.
Tottenham Hotspur Football
& Athletic
CROSSMAN, J.
JULY 9, 23 AND 31, 1935
Manningham-Buller, for the plaintiffs.
J.B. Lindon, for the defendants.
Crossman,
J.—having staged the facts, continued: The first point made for the
plaintiffs is, that article 16 of the company's articles of association does not prevent the questions in those interrogatories from
being aked. For the purpose of deciding that point, it has been agreed between
the parties that the question which I shall determine is whether if the
interrogatories were allowed (assuming that they are proper to be allowed) the
company would be bound to answer them, and I am not to allow the
interrogatories if I am of opinion that the company would not be bound to
answer them if they were allowed. The question then is whether the company
would be bound to answer these interrogatories or whether it is excused from
answering them by article 16 of the Articles of Association. The
plaintiffs rely upon a decision of Tomlin, J., (as he then was) in Sutherland
(Duke) v. British Dominions Land Settlement
Corporation, in which the learned Judge had to consider somewhat similar
circumstances, where the relevant article was: "The directors may
without assigning any reason, decline to register any
transfer of shares not fully paid up made to any person not approved by them or
by any member jointly or alone indebted or under any liability to the
company." Tomlin, J., held that the plaintiffs were entitled to
interrogate the defendants as to whether the transfer was to a person of whom
the directors did not approve, and whether the plaintiff was in fact a person
jointly or alone indebted to the company. In the course of his judgment he
distinguished between the two points on which inquiry might be made, namely,
the reasons upon which or for which the directors acted in declining to
register, and the grounds of their objection to registration, which he
regarded as two distinct things, and he shows clearly that, he distinguishes between the reasons for exercising the power
and the grounds which give rise to its exercise. In the case before him,
the only thing which the directors were excused from doing
was assigning a reason. The directors would never be bound in those
circumstances to assign any reason, but the learned Judge held that that did
not excuse them from specifying under which particular branch of the article
excusing them they were acting. He held that it was their duty, as he Said, to
say under which branch they were acting, and that that would be done by
answering the particular interrogatories which were
delivered in that case.
In the present
case, the words in the article are not, as they were in Sutherland v. British Dominions Lands Settlement Corporation, "without assigning any reason". They
are "shall not be bound to specify the grounds" and
constitute, to my mind, a very much stronger expression. I cannot, as a matter of construction, come to the conclusion
that "specify the grounds" means the same as "assign the
reasons," having regard to the statement of Tomlin, J., I think they are
two quite different things, and that what the directors are excused or saved
from doing in the case before me is naming the species of ground under
which they have acted: that is to say, the particular
interrogatories which it is sought to administer here ask them to do the very
thing which in my judgment, on the construction of this article, it is provided
that they are not bound to do. In my view of the construction, that seems to me
to dispose of the matter so far as regards Mr. Berry, the plaintiff, who is a
member of the company, but it is contended by counsel in his very able argument
that here I must draw a distinction between a plaintiff who is a member of the
company and a plaintiff who is not, that Article 16 binds only members
of the company, and that a person who is not yet a
member of the company can become a member of the company under the articles,
but disregard the prohibitions of Article 16. In my judgment that is not
the case. In my view, Article 16 applies to a person
who is applying to be registered, because it specifies the conditions
upon which he is to be registered; the directors are to register, on those terms, but if the directors decline to register,
then he comes in and asks to be registered under the article, and as the
articles provide that they are not bound to specify the grounds, it
seems, in my judgment, that the directors are just as
much entitled to rely upon the article in the case of the plaintiff Stewart as
they are in the case of the plaintiff Berry who is a member.
That leaves one
further point with which I must deal. It is suggested before me that the
fact that by agreement—either by the articles or by any other agreement—persons
are prevented from making any particular enquiry, does
not prevent them, if they bring an action in connection with the matter of that
agreement or by virtue of that agreement, from making that point. It has been
suggested that interrogatories are a matter arising out of the Rules of Court,
and that any agreement the parties have entered into does not necessarily bind
them or does not prevent the person being liable to give any information he is
bound to give in the agreement. I think Turney v. Bayley is really an
authority to the contrary, because I think it shows
that the existence of an agreement is a ground for refusing a certain sort of
discovery. I do not see any reason why that should not be applied to
interrogatories as it was applied there to the production of a document. It
seems to me that when I have got a provision that a party shall not be bound to
produce a certain document in connection with a particular matter, the
mere fact that an action is brought and an application made to deliver interrogatories does not entirely oust that
agreement and preclude the person who had the benefit from relying on it. In
any event, in the circumstances of the Rule of Court under which I have to act,
I think it would not be right for me to allow these interrogatories, because on
the view I take—if I am Tight—I should be allowing interrogatories which
expressly override the terms by which the parties,
either as members of the company or as persons claiming to be members of the
company, are bound. I feel, therefore, that I ought not to allow them.
[1960]
30 COMP. CAS. 30 (HL)
V.
Scott's Trustees
Lyle & Scott Ltd.
V.
LORD
REID, LORD TUCKER, LORD KEITH OF AVONHOLM AND LORD SOMERVELL OF HARROW,
VISCOUNT SIMONDS
MAY
4, 5, 6 ; JUNE 18, 1959
VIACOUNT
SIMONDS, J. - My Lords, the
respondents, whom I will call "Scott's trustees,"are, and were in
November, 1956,the registered holders of a number of ordinary shares of the
appellant company. The precise number has not been disclosed: it is sufficient
to say that it is more than one perecent of the issued ordinary share capital,
that being so, their power to dispose of the shares is limited by certain of
the articles of association of the company. I must refer to them in some
detail.
Article 7
provides that the directors may in their absolute discretion and without
assigning any reason therefor decline to register any transfer of any
share.Whether or not it is fully paid share this article must be born in mind
in construing the succeeding articles. Article 8 provides that subject to the
provisions of articles 7 and I2 ordinary shares may be dealt with by an
ordinary shareholder by way of transfer or bequest to or conveyance to trustees
for behalf of certain relation with or without any consideration being pain.
Article 9 is that upon which this appeal turns and I must set it out in
extenso: "Subjects to the provisions of clauses 7,8 and I2 no registered
holder of more than one per centum of the issued ordinary share capital of the
company shall, without the consent of the directors, be entitle to transfer any
ordinary shares for a nominal consideration or by way of security, and no
transfer of ordinary shares by such a shareholder shall take place for an
ignores consideration so long as any other ordinary shareholders is willing to
purchase the same at a price, which shall be ascertained by agreement between
the intending transferor and the director and, failing agreement, at a price to
be fixed by the auditors of the company for the time being. Any such ordinary
shareholder who is desires of transferring his ordinary shares shall inform,
the secretary in writing of the number of ordinary shares which he desires to
transfer, and the price shall immediately be fixed as aforesaid. Thereafter the
secretary shall intimate the same to all the other holder of ordinary shares
simultaneously by written notice containing particulars of the intending
transfer. Thereafter each ordinary shareholder receiving such notice shall ve
entitled, within fourteen days from the date of the notice, to intimate in
writing to the secretary that he offers to purchases some or all of the shares
mentioned in the intimation made of him; otherwise he shall not be a party to
the offer. On the expiry of the fore said fourteen days' notice, the secretary
shall report the result to the directors who shall divide and appropriate the
shares specified in the notice among the offers in proportion to the number of
ordinary shares held by them respectively or as near thereto as possible,
provided that no offered shall have apportioned to him a greater number of
shares than he has offered to purchase. If any difficulty shall arise in
apportioning the said shares or any of them, the directors may appropriate the
shares in respect of which such difficulty arise among the offers in such
manner as they think fit or otherwise in their sole discretion. If after
intention by the secretary to the ordinary shareholders in manner aforesaid the
number if shares offered to be purchased by them shall be less than the number
of shares, which the intending transferor gave notice of his desire to
transfer, or if offering ordinary shareholders shall fail to complete their
purchases of such shares as shall be appropriated to them within one month
after the date of such appropriation, the intending transfer may transfer the
shares indisposed of to any person whether a member of the company or not, as
he thinks proper,provided that he shall not take for them less than the price
to be ascertatined as aforesaid without first offering them in manner aforesaid
to the other ordinary shareholders at such lower price." Articles 10, 11
and 12 also deal with transfer or transmission of shares but I think that there
is nothing in them relevant to this appeal.
In these
circumstances in November, 1956, Scott's trustees and all other shareholders of
the company were approached by a firm of selectors acting on behalf of a
principle, who, though his name was then undisclosed, later proved to be a Mr.
Hugh Fraster, with a written offer to purchase their shares. The offer was
expressed to be subject to certain terms and conditions, of which the first was
that the offer was conditional upon acceptance by the holders of 75 per cent.
of the ordinary shares then in issue or such lesser proportion as their client
might in their absolute discretion accept as sufficient, and the second that
the price for each ordinary shares should be Poun 2 Ios. and should be
inclusive of any ordinary dividend declared subsequent to the date thereof and
that the price for each preference share should be 20s. with a similar
provision in regard to dividend. Then there was a condition about holdings of
both ordinary and preference shares, and them this condition which I deem of
sufficient importance to set out in full: "The price shall be satisfied by
payment in cash on or after December I8, 1956, against delivery of valid and
effective transfers of the said ordinary and/or preference shares together with
the relative share certificates and a general proxy in favour of our client'
nominee." Certain other conditions were expressed to which I need not
refer, and lastly it was provided that: "Acceptances of this offer must be
received by us not later than first post on November 27, 1956, on the enclosed
form of acceptance duly signed by you." By a subsequent letter the price
offered for each ordinary share was increased to Pond 3 and the time for
acceptance was extended.
By the
enclosed form of acceptance, which was signed by Scott's trustees and returned
by them, they agreed subjects to the terms and conditions of offer the to sell
to the client of their correspondents their holdings in the company at the
price of 20s. for preference shares and 60s. for ordinary shares. They further
agreed that in the event of the offer becoming unconditional according to its
terms they authorised them to use the enclosed form of proxy and they also
agreed to deliver up their share certificates in respect of all their shares in
the company which they had agreed to sell and to sign the relative transfer
deeds when called upon to do so in exchange for the price. On or about December
4, 1956, they were informed by the said solicitors that a majority of the
shareholders had accepted the offer and that the acceptances were no longer
open for rejection.
On or about
December 20, 1956, the purchaser, whom I may now refer to as "Mr.
Fraser," paid Scott's trustees British pond 3 for each ordinary share and
pond I for each preference share held by them and they delivered to him or his
agent the relative share certificates and a completed form of general proxy.
The
appellants, learning of these proposed transactions, called the attention of
Scott's trustees to the terms of article 9 by letters of December 5 and I4,
1956, and finding that their letters were ignored, on December 3I,1956, raised
the action against Scott's trustees out of which this appeal arises and at the
same time raised similar action against twelve other shareholders who had
accepted Mr. Fraser'a offer.
I can pass
over the next skirmish between the parties, which took the forms of an attempt
by certain shareholders, who had sold their shares, to remove three of the
directors front the board of the company and substitute other of their or Mr.
Fraser's choice. This attempt met the failure that it deserved and so the
action proceeded.
It is
convenient now to refer to these conclusions of the summons which are
stillalive, for the appellants have so far failed upon the ground that, though
the provisions of article 9 have been breached by Scott;s trustees, they have
not established their right to the remedy they have claimed.
Conclusions I
and 2 of the summons are as follows: I. For declarator that the defenders, in
respect that they are the holders of ordinary share of Lyle & Scott Ltd.
amounting to more than one per centum of the issued ordinary share capital of
the said company and are desirous of transferring the said ordinary share for
an onerous consideration, are bound to implement the terms of article 9 of the
articles of association of the said company and the number of ordinary secretary
of the said company in writing of the number of ordinary shares which they
desire to transfer. 2. For decree ordinary the defenders forthwith to implement
the terns if the said article 9 by informing the said secretary in writing of
the number of ordinary shares which they desire to transfer."
At the hearing
before the Lord Ordinary, as also before the First Division, the debate appears
to have been divided into two parts. First, it was questioned whether Scott's
trustees had been quality of a breach of the first or prohibitive part of
article 9, a question answered in the affirmative by the Lord Ordinary and the
learned judges of the First Division who thought fit to answer it. But,
secondly, it was asked whether, upon this assumption, the appellants were
entitled to the remedy they sought, and here they had no voice in their favour.
This was no doubt, a convenient way of examining the curious problem which
arises in this case, but it was perhaps apt to obscure the vital question
whether upon the facts which I have set out Scott's trustees are to be deemed
to be shareholders desirous of transferring their ordinary shares within
article 9. If they were the appellants would be entitled to their relief,
whether or not what Scott's trustees had done was a breach of the first part of
the article.
I do not
dissent, my Lords, from the opinion expressed by the Lord Ordinary and the Lord
President and :Lord Russell in the First Division that Scott's trustees had been
guality of a breach if this part of the article. The determination of his
question rests on the meaning to be assigned to the word ‘transfer’ where it
there occurs. But I do not think it necessary to express a final opinion upon
it, for, as I have said the question is not whether what has been done is
breach of first part of the article but whether it demonstrates with sufficient
clearness that Scott's trustees are persons desirous of transferring their
ordinary shares. It appears to me that there is no room for doubt that that is
just what they are. Here I can proceed on their admissions. For since it is the
admitted fact that they entered into the agreement for sale of their shares and
have received and retain the price, it follows that, whether or not they have
yet done all that they ought as vendors to do, they hold the shares as trustees
for the purchaser. They are bound to do everything that in them lies to perfect
the title of the purchaser. They cannot compel the company to register him as
the holder of the shares, but everything else they must do, and it is straining
crudity too far to suppose that everything else would not already have been
done, if it had not been hoped to gain some tactical advantage by delay. In my
opinion, it is not open to a shareholder, who has agreed to do a certain thing
and is bound to do it, deny that he is desirous of doing it. I wish to make it
quite clear, for it goes to the root of the matter, that I regard Scott's
trustees as desirous of transferring their ordinary shares unless and until
their agreement with Mr. Fraser has been abrogated. Of this at least one acid
test would-be the return by them of the price they recevied.
Against this
view it was urged that they were not desirous of transferring their shares within
the meaning of the article because they had not a general desire but a
particular desire to transfer only to Mr. Fraser at a certain price. This makes
nonsense of the article, the purpose of which would be wholly defeated if it
did not apply to a desire to transfer to a particular person, who might be the
person whom the company particularly wished to exclude. That it was contended
that they were not desirous of transferring their shares, because their task
had been done and their desire satisfied. I think my Lords, that this ingenious
and almost humorous plea ignores that they have elsewhere pleaded and
vigorously relied on the fact the transfer has not been completed. This plea
had perhaps not been thought of when they decided not "at the present
time" to have deeds of transfer executed.
If, then,
Scott's trustees are as I hold they are, shareholders desirous of transferring
their ordinary shares, what follows? It is at this point that I am constrained
to differ from the opinions of the learned judges in the courts below. I
cannot, for instance, accept the view of the Lord President that there has been
no over act which could enable the company to require the defenders to follow
out the procedure in the article, nor do I find it easy to reconcile this part
of his judgment with his decision that Scott's trustees had infringed the
article by transferring or purporting to transfer their shares to Mr. Fraser.
what more conspicuous overt act,evincing the desire to transfer,could there be
than this? I must agree with Lord Sorn that there may in some cases be
difficulty in determining when a shareholder begins to be desirous and when he
ceases to be desirous and at what stage he is at liberty to change his mind. I
will therefore say something on this aspect of the case. I have already
indicated that a shareholder who has agreed to sell his shares and has received
the price is to be deemed to be desirous of transferring them. At once,
therefore, the machinery of the article is put in motion and he must inform the
secretary of the number he has agreed to he desires to sell, which is ex
hypothesis the number he has agreed to sell. The price is then fixed in the
manner prescribed by the article and so the matter proceeds. But can he at any
stage change his mind, abandon his desire, and stop the machinery? I have
already indicate that his desire must be deemed to continue so long as he
adheres to his contract of sale. I do not wish to be domestic upon a question
which may be the subject of other proceeding. But I will add that the onus will
be on him to satisfy the company and, if necessary the court that his desire is
spent and his proof must be congent. If he succeeds in this and if the
machinery has not operated so far that a contract has been made with the other
shareholders, it appears to me that he can withdraw his offer for that is what
the intimation that he desires to sell amounts to. I do not at all dissent from
the view expressed in smith v. Wilson [1901] 9 SLT 137 that an offer made in
pursuance of an article of this kind may be timeously withdrawn, what is
timorous depending, of course, on the language of the particular article. He is
thus placed in the same position as any other share holder who wishes to sell
his shares in the manner prescribed by the article if he can get a satisfactory
price for them. That is the bargain he made when he became a shareholder and he
must abide by it. What he cannot be permitted to do is to adhere to his
contract and in the same breath assert the he does not desire to transfer his
shares. It may well be that he thus places himself in a position of
disadvantage vis-a-vis the purchaser with whom he has contracted. But it cannot
be denied that he has done so with his eyes open.
I would
therefore allow the appeal with costs he and below. The order will be in the
form which my noble and learned friend, Lord Reid, has prepared, and will
intimate to the House.
My Lords, in
the second case, Lyle & Scott Ltd.v.British Investment Trust Ltd., the
respondents are shareholders of the appellant company and hold more than I per
cent. of its issued ordinary shares. I cannot in any relevant matter
distinguish this case from that of Scott's trustees with which the House is
dealing. The same order must, in my opinion, be made.
LORD REID. My
Lords, in these two actions the pursuers and appellants are a private company
whose articles of association contain provisions restricting the transfer of
shares. The company carry on a knitwear and hosiery business in Hawick. In each
case the defenders and respondents are shareholders of the company. On November
6, 1956, a firm of solicitors in Edinburgh, acting on behalf of a client then
undisclosed but now know to be Mr. Hugh Fraser, sent to all the shareholders
letters offering to purchase their shares, the offer being conditional on
acceptance by the holders of 75 per cent. of the ordinary shares. The price
offered was Pond 2 I0s. Which was subsequently increased to Pond 3 per share,
and this was to be payable against valid and effective transfers and a general
proxy in favour of the purchaser's nominee. Both respondents accepted the offer
by offer by completing and returning the form of acceptance sent to them and
also completing a form of proxy. In the acceptance they agreed to sell their
shares, authorised the use of the proxy, and agreed to deliver up their
certificates and to sign transfer deeds when called on in exchange for the
price.
On december
3I, 1956, the appellants raised actions against the resondents and about ten
other shareholders who had accepted the offer. On January 22, 1957, their
secretary received notices requisitioning general meeting of the company for
the purpose of removing three of the directors and appointing Mr. Fraser and
two others whom he wished to have appointed. Conclusions for interdict were
then added and interim interdict was granted to prevent the defenders from
voting at the meeting. I need not deal further with this matters because there
is now no conclusion for interdict in these cases: We were informed that other
proceedings are pending between the parties.
The
appellants' case is that by reason of the provision of the articles the
respondents were not entitled to enter into these contracts for the sale of
their shares. Article 7 permits the directors in their absolute discretion to
decline to register any transfer of any share.Article 8 permits transfer or
bequest to or conveyance to trustees for behalf of certain relatives of a
shareholders. Article I2 deals with shares held by employees of the company.
The article which is important in this case is article 9, which is in these
terms: [His Lordship read the article and continued:]
The
respondents are each holders of more than 1 percent. of the ordinary shares,
and it is clear from their defenses that they have received the price of Pond 3
per share and that they have not attempted to resale from their contract with
Mr. Fraser. The appellants maintain that this necessarily means that they are
desirous of transferring their shares within the meaning of this article, and
that they are therefore bound so to inform the secretary of the company so as
to set in motion the privations of the article under which the other
shareholders are entitled to haven an opportunity to purchase any share which
any shareholder is desirous of transferring. The only conclusions of the
summons now in issue are for declarator that the defenders, in respect that
they are desirous of transferring. their shares, are bound to implement the
terms of article 9 and for decree ordinary them forthwith to do so by informing
the secretary of the number of ordinary shares which they desire to transfer.
The Lord
Ordinary, Lord Strachan, and the First Division have held that the respondents
have contravened the provisions of article 9, but that the appellants are not
entitled to the remedy which they seek. Before your Lordship the appellant
supported the first of these findings but maintained that the second was
erroneous. One at least of the respondents maintained that the appellants'
averments disclose no breach of article 9: both support the decision of the
Court of Session that the remedy which the appellants seek should not be
granted.
I have come to
the conclusion without difficulty that on their own admission the respondents
are in breach of article 9. The purpose of the article is plain: to prevent
sales of shares to strangers so long as other members of the company are
willing to buy them at a price prescribed by the article. And this is a
perfectly legitimate restriction in a private company. But the respondent argue
that, whatever may have been the intention the terms of the article are such
that it has only very limited application. They say that "transfer"
and "transferring" only apply to a complete transfer of the ownership
of shares by acceptance and registration of deeds of transfer, and that a
shareholder who agrees to sell his shares is quite entitled to do so and to
receive the price and vote as the purchaser wishes so long as he is not
desirous of having a transfer registered.
I see no
reason for reading the article the article in that limited way. Transferring a
share involves a series of steps, first an agreement to sell, then the
execution of a deed of transfer and finally the registration of the transfer.
The word transfer can mean the whole of those steps. Moreover the ordinary
meaning of "transfer" is simply to hand over or part with something,
and a shareholders who agrees to sell is parting with something. The context
must determine in what sense the word is used. In article 7 it clearly means a
deed of transfer. In article 8, which authorises certain dealings "by way
of transfer or bequest," it must, I think, refer to the sale or gift of
the shares. I have already referred to the obvious purpose of article 9; to
give the other shareholders an option to purchase shares which any shareholder
desires to part with. To be effective it must come into operation before that
shareholder agreed to sell to anyone else, and the last part of the article
clearly contemplates this: If the other shareholders do not purchase any or all
of the shares the owner "may transfer the shares indisposed of to any
person...provided that he shall not take for them less than the price to be
ascertained as aforesaid, without first offering them " to the other
shareholders at the new price. That appears to me make it clear that the
shareholder " desirous of transferring" shall so inform the secretary
before he makes any agreement to sell to anyone, and that he is only entitled
to agree to sell to a stranger such shares as the other shareholders fail to
purchase under article 9. I find nothing in the article which is inconsistent,
or ever difficult to reconcile, with this interpretation of it.
Whether the
appellants are entitled to the remedy which they seek depends in the first
place on whether the respondents are now "desirous of transferring"
their shares. They were certainly desirous of doing so when they made their
contracts with Mr. Fraser. It is said that, thought they desired to transfer to
him at Pond 3, they never desired to transfer to the other shareholders under
article 9. But the article does not say desirous of transferring in the manner
which it provides. It simply says desirous of transferring and, if it is to be
effective in ensuring that the other shareholders have an option to purchase,
it must apply whenever a shareholder desire to sell to anyone , Then it is said
that the respondents' desire to transfer has never been evinced by any overt
act on which the appellants can found. But if the respondents' admitted action
were in breach of their obligations, I do not see that it matters whether or in
what sense they were "overt." I would not hold a desire to transfer
proved by some equivocal words or acts. But here it is impossible that the
respondents could have done what they did unless they desire to transfer: there
is no suggestion of any other reason why they should have contract with Mr.
Fraser.
Another
argument was that article 9 cannot be used as a complusitor, that it is an
avenue open to a shareholder who desires to sell his shares, but that he cannot
be compelled to use it. That is true in a sense. No action can be taken against
a shareholder who merely says that he wishes to sell or does something which
shows that that is his intention. But, when he goes further and does something
which is a breach of his obligations under the article, the position appears to
me to be quite different. Unless some action then be taken to assert the other
shareholders’ right under the article can there is a wrong without a remedy.
The
respondents next maintained that, even if they were desirous of transferring
their share when they made these contracts, they are entitled to say that they
are no longer desirous of doing so. They do not deny that they that have
received and intend to keep the price of the shares. But they say that at
present neither they nor the purchaser intent transfers to be made. They appear
to be waiting to see whether some change will be made in the appellant company
which will result in transfers being accepted and registered. But in my
judgment, a person who agreed to sell with a view to a transfer at some future
date cannot be heard to say that he is not desirous of transferring the shares
merely because it suits him and the purchaser to delay execution and
presentation of the transfers.
One reason for
not granting this remedy which appears to have weighed heavily with the learned
judges of the Court of Session is that if it is granted the respondents will be
unable to avoid a compulsory sale of their shares to other shareholders who are
willing to buy them in terms of article 9. If that were so I would find this
case much more difficult. It would seem unjust that a shareholder who in
bonafides mistakes his right should be compelled to sell his shares on terms
which he cannot control, and I might find it difficult to read such a meaning
into an article of this kind. But I think that that is not the meaning of
article 9. That article requires a notice to be given by any shareholder who
desires to sell his shares, but it does not made such a notice irrevocable. No
doubt it becomes irrevocable when the procedure following on it results in a
contract between the shareholder giving the notice and another shareholder who
has made an offer for the shares, and I need not discuss the question of the
exact stage at which such a contract emerges. Bur until that stage is reached
it appears to me that it is open to the shareholder who gives the notice to
withdraw it: I see no reason too doubt two decisions of the Court of Session on
this matter Smith v. Wilson.
Both these
cases arose out of the same transaction. In I900 Wilson, as trustee in a
sequestration, advertised for sale shares of J. M. Smith Ltd. and on January 20
Stevenson agreed to buy the shares. An article of association of the company,
known to both, required a shareholder wishing to sell first to offer his shares
to the company at a stated price and contained provision for their sale to the
directors or other shareholders. Wilson duly offered the share under this
article but for some reason which does not appear he withdrew this offer before
it was accepted. In the first of these two cases the Second Division held that
he was entitled to do so. Stevenson then paid the price and presented transfers
in his favour which the company refused to register, but apart from that the
company raised no objection to Wilson having agreed to sell Stevenson. Possibly
this was because in the circumstances it did not matter to the company that
Stevenson should have a beneficial interest in the shares or that Wilson should
vote as Stevenson required him to do. Then there was a deadlock because the
company refused to pay dividends to Stevenson and Wilson refused to collect
them and hand them to Stevenson, and the second of these action was raised by
Stevenson. The Lord Ordinary held that the shares were held by Wilson in trust
for Stevenson and he was required to produce an account of his intermissions.
The First Division adhered and Lord Dunedin said "... When there is a stipulation
in the articles of the company allows the directors of the company to refuse at
their own hand any particular transferor, then A and B, who are contractingg do
so with their eyes open, and knowing that it may be the case that B will not be
accepted as a transfer. It still becomes the duty of B, if he cannot get the
[company] to register him, to find a transfer whom the [company] will register
in order to free A, and I think, if he is entirely unable to do that, A can
bring the bargain to an end. But I think he could only do so in the ordinary
way by annulling the bargain matters to their back the money he had got from B
and bringing matters to their entirety," As Wilson did not desire to
annual the bargain or give the money back he must "fulfill this obligation
of quasi-trustee to which the judgment of the Lord Ordinary subjects him."
From these
cases two things follow-first, any notice given by the respondents would not be
irrevocable, and secondly, the respondents can if they chose annual their bargains
with Mr. Fraser. The cases are of no assistance on the question whether a
company is entitled to object and take action if a shareholder purports to sell
to a stranger in breach of its article because J.M. Smith Ltd. did not object
and this question was not raised.
Under article
9 the respondents are: bound to give notices so long as they are desirous of
selling their shares, and they must be held to be desirous of selling their
shares so long as they maintain and do not annual their contract with Mr.
Fraser. It is in their power to do that, and, once they have done so they, will
be entitled to say that they are no longer desirous of transferring their
shares. So any decree requiring them to give notice must be so qualified that
they are only required to give notice if they are still desirous of
transferring their shares. And, even if they have not terminated these
contracts before they are required to give notice, they could still do so and
withdraw the notices before any contract with the other shareholders had been
made. But if either of the respondents does not withdraw the notice then the
shares to which it relates will pars to other shareholders who acquire them
under article 9 and the respondents will receive the price payable under that
article.
In these
circumstance, I see no difficulty in granting a decree of the kind sought. It
is a decree requiring specific implement, requiring the respondents to do
something which they have undertaken to do and which they are still able to do.
It is argued that a court should not order a person to do something which he
can immediately undo. As a general proposition that may be true, but here the
purpose of the decree is to afford a remedy against a continuing breach of an
obligation and the step ordered could only be undone after that breach bad
ceased.
In view of the
respondents' admissions in their defence no proof is necessary, and their
counsel did not maintain that proof should be allowed. In my judgment, the
interlocutors appealed from should be recalled and the cases should be remitted
to the Court of Session with a direction in each case (I) to repel the first
plea-in-law for the defenders and to sustain the sixth plea-in-law for the
pursuers, (2) to grant decree of declarator that the defenders, being the
holders of ordinary shares of Lyle & Scott Ltd. amounting to more than one
per centum of the issued ordinary share capital of the said company and having
agreed to sell their said shares, have shown themselves to be desirous of
transferring their said shares within the meaning of article 9 of the articles
of association of the said company and are therefore bound to implement the
said article 9 by informing the secretary of the said company in writing of the
number or ordinary share comprised in the said agreement of sale, and (3) to
ordain the defenders, standing the said agreement to sell forthwith to
implement the term of then said article 9 by informing the said secretary in
writing of the number of ordinary shares which they have agreed to sell and to
proceed as accords.
LORD RUCKER.
My Lords, by signing the form of acceptance which had been enclosed in the
letter of November 6, 1956, from Messrs. Hill, Dpugal & Co. on behalf of
Mr. Hugh Fraser the respondents entered into a contract with Mr. Fraser whereby
they agreed to sell all their ordinary shares in Lyle & Scott Ltd. and to
deliver their up their share certificates and sign the relative transfer deeds
when called upon to do so in exchange for the price. They thereby bound
themselves to take every step which is required from the holder of a share who
desires to transfer to another the legal and equitable title to his share. They
have received from Mr. Fraser the agreed purchase price and the contract still
subsists. By so doing they have, in my view beyond question taken an overt act
signifying their desire to transfer their shares within the meaning of articles
9 of the article of association of Lyle & Scott Ltd. Such desire must be
taken as continuing so long as the contract subsists. The desire to sell having
been established, it become imperative for the respondents to inform the
secretary of the company in writing of the number of share they desire to
transfer and thereby to bring into operation the procedure contained in the
article for offering such shares to all the other ordinary shareholders at the
price fixed in accordance therewith.
I cannot
accept the respondents's contention that the desire to sell envisaged by the
article does not include a desire to sell to some specific person but only
applies to a desire to sell to some unascertained purchaser who may be found as
a result of notification to the secretary and putting into operation the
procedure of the article. This step of informing the secretary was no taken and
the respondents were and continue to be in breach of the article. For the
purpose of ascertaining whether or not there has been a breach it is not, in my
opinion, necessary to decide the meaning of the word "transfer" in
the first nine lines of the article as printed at page 82 of the appendix to
the Record nor to consider whether the steps so far taken by the respondents
constitute a transfer.
For these
reason I am in agreement with the decision of the First Division of the court
of Session that the appellants have relevently alleged in their pleading a
breach of article 9.
With regard to
the remedies sought for the breach, I agree with your Lordship that, subject to
the proposed modification of the language or relief set out in conclusion I and
2, the appellant are entitled to the relief claimed therein. The court or
Session, in coming to a contrary conclusion, were I think, much influenced by
their view that the respondents could not be deprived of the locus poententiae
afforded to them under the article of withdrawing their notification of
willingness to sell before acceptance. I agree with your Lordships that relief
in the terms proposed by my noble and learned friend, Lord Reid, makes it plain
that no such consequence can result . I also agree that the only matter of fact
in dispute on the pleadings being whether transfers were executed nad whether
the share certificates were deposited or handed over for inspection and
returned and that the determination of these questions being unnecessary for
the decision of these appeals, your Lordship can dispose of them without
requiring that the case should go for proof.
LORD KEITH OF
AVONHOLM. my Lords, this is my opinion in Lyle & Scott's Trustees. This
case, I think, can be disposed of on the averments of the parties on record
without the necessity of a proof. The case turns upon the meaning and effect of
article 9 of the pursuers' articles of association which has already been
quoted. It is quite clear from the admission of the defenders that they have
agreed to sell their shares to an unnamed purchaser, and have received payment
of the purchase price. The defenders qualify this admission by saying that they
have only sold the beneficial interest and have no intention of exacting a
document of transfer "at the present time." They say they have no
intention of invoking article 9. I shall consider the bearing of these
qualifications in a moment. The Lord Ordinary has,. I consider accurately
stated the position when he says: "The defenders' averments as a whole
seem to me to indicate a sale or transfer of the shares subject to a condition
that the formal steps necessary to complete the transfer should be postponed
for a period which is not stated. If that be a right reading of the defences, I
take leave to suspect that the delay in completing the transfer was introduced
simply in order to leave open an argument that article 9 did not apply to the
circumstances of these particular transaction."
The defenders
in fact relied for their main argument on the submission that article 9 did not
apply here at all. Their argument proceeded on a very narrow point. The word
"transfer" in the prohibitory words in article 9, "no transfer
of ordinary shares...shall take place for an ones consideration so long
as," etc., meant, they said,"no registration of an instrument of
transfer shall take place." Form this, as I understood it, the next stage
was reached that the words: "Any such ordinary shareholder who is desirous
of transferring his ordinary shares shall inform the secretary in writing of
the number of ordinary shares which he desires to transfer," etc., must be
read as referring to an ordinary shareholder desiring to register an instrument
of transfer. As the defenders were not, at the moment at least, so desirous,
article 9 could not be invoked. I am unable to accept such a construction of
article 9. For one thing, it is not the vendor who has the instrument of
transfer registered but the purchaser. But apart from that it is apparent from
a cursory perusal of the article that the word "transfer" is used in
varying senses in different places, depending on the context. For instance, in
article 2(a), "not transfer which would increase such number of members
beyond fifty shall be valid" clearly must refer to a registered transfer,
but the very next words "and the directors shall refuse to recongnise or
register any transfer which would so increase such number," refers to an
unregistered instrument of transfer. So also under article 7 the directiors may
in their absolute discretion decline to register any transfer on any share. On
the other hand, there are provisions which, in my opinion, use
"transfer" in the broad sense of "dispose of" or
"sell." Thus article 9 itself concludes by saying that in certain
eventualities "the intending transferor may transfer the shares undiposed
of to any person." That, of course, will cover all the steps necessary to
effectuate the title of the purchaser. But it must star with an agreement to
sell for a price. It is not the intending transferor who completes the transaction
but the purchaser, and the document of transfer requires the signatures of both
purchaser and seller. So also an article I2, which provides that an employee
shareholder who ceases to be employed by the company, or by a subsidiary
company, shall "transfer his ordinary shares to the nominees of the
directors," "transfer" is used , in my opinion, in a broad sense
as meaning "disposed of " his shares to the directors' nominees.
Even if the
word "no transfer to ordinary shares...shall take place" were to be
read as meaning "no transfer of ordinary shares shall be registered,"
it does not therefore follow, in my opinion, that under the article a
shareholder does not express his desire to transfer his ordinary shares until
an instrument of transfer of the share has been presented for registration. If
I may express my view of the article in the most general sense, I think the
prohibitory part of the article is the sanction which prevents a shareholder
from carrying through a transfer of shares without complying with the machinery
of transfer set out in the second part of the article. And I think a
shareholder who has transferred, or pretended to transfer, the beneficial
interest in a share to a purchaser for a value is merely endeavoring by a
subterfuge to occupies from the peremptory provision of the article. A share is
of no value to anyone without the benefits it confers. A sale of a share is a
sale of the beneficial rights that its confers, and to sell or purport to the
beneficial rights without the title to the share is in my opinion, a plain
breach of the provisions of article 9. This, I think, is the view which
commended itself to Lord Sorn, and I think he is right. What has happened in
the present case is that by virtue of the article the purchaser is unable to
take the seller's name off the register and substitute his own. The defender
have done everything apart from executing a formal instrument of transfer that
would be necessary to a normal purchase and sale of shares. They have even done
more, for they have executed proxies in favour of the purchasers' solicitors.
While leaving it open whether there has been any breach of the prohibitory part
of article 9, which may be directed rather to the company and is board than to
the shareholders, I am clear that there is here a clear breach of the positive
part of the article requiring an intending transferor to inform the secretary
in writing of the number of shares he wishes to transfer and an invasion of the
right of the shareholders under the article. The admitted acting of the
defenders, in my opinion, lead to the inevitable inference that they are
desirous of transferring their ordinary shares. The qualifications that the
defenders seek to attach to their admissions, videlicet, that they have no intention
of invoking article 9, and that neither the purchaser nor the defenders intend
that a document of transfer shall be executed or delivered "at the present
time," do not, in my opinion, affect the matter one bit. Standing a
completed and unrepudiated contract of sale and acceptance of the
purchase-money, the defenders cannot be heard to say that they are not desirous
to transfer their shares because they choose for some reason or other to hold
up completion of the document of transfer or wish to sell only to a particular
person.
The Lord
Ordinary and their Lordship of the First Division have taken the view that it
is not open to compel the defenders to initiate the procedure laid down in the
article by giving notice to the secretary of their desire to sell their shares.
They seem to have proceeded on the view that it is for the defenders, and the
defenders alone, to say whether they will set the machinery of the article in
motion by intimating their desire to the secretary. The Lord President would seem
to look for some overt act of such desire, such an act as notice to the
secretary. The decision in Smith v. Wilson was also thought by their Lordship
to be adverse to imposing any complusitor on the defenders.
In my opinion,
the admitted acting of the defenders are overt acts amply sufficient for any
court of law to infer a desire on their part to sell their shares. There must
reside in the courts some power to enforce observance of the article, unless
the rights of the shareholders are to be defeated, and the appropriate step at
this stage, in my opinion, is to ordain the defenders to give notice to the
secretary of their desire to transfer the number of share which they have
contract to sell to their purchaser. There is nothing in the decision in Smith
v. Wilson to prevent such a course. In that case Wilson offered, under a clause
similar to that in the present case, certain shares to the company concerned.
The offer was made on January 3I, 1900. The offer was intimated by the board to
the other shareholders, and on February I0 a shareholders lodged with the
company a sealed offer to buy the shares. Before this the intending seller had
withdrawn his offer on February 5. The only point considered was whether Wilson
was bound to keep his offer open for fourteen days from the board's notice to
other shareholders, within which a shareholder could lodge his offer to buy.
The court held that Wilson was not bound to keep his offer open for that
period. It appears from the later case of Stevenson v. Wilson that Wilson had,
on January 30, 1900, entered into a conditional contract with Stevenson, which
incorporated the company's articles of association, for sale of the shares
which he offered to the company on January 3I. But no point was taken on this
Smith v. Wilson. In Stevenson v. Wilson, Wilson being still on the register,
the Lord Ordinary (Lord Salvesen) granted a declarator (I) that Stevenson had
the beneficial right in the shares and (2) that Wilson held them in trust for
him so long as wilson remained on the register and the pursuer (Stevenson) held
the beneficial interest. The company was cited as a defender in this litigation
but no decree was made against it and the Lord Ordinary held that declarator
granted were not binding on the company that the company was not bound under
its articles to recognise the pursuer's (Stevenson's) beneficial interest.
Wilson reclaimed to the First Division,which adhered to the Lord Ordinary's
interlocutor. The Lord President (Lord Dunedin) pointed out that a seller of
shares was ordinary entitled to get his name off the register but that under
their contract both seller and buyer knew this might be impossible. It still
remained, however, the duty of the buyer to find a transfer whom the company
would register,and if he could not do so, the seller might bring the contract
to an end. In neither of these cases was any of the question that have been
debated in this case considered. Nor could they have been, unless they were
raised by the person competent to do so, the company or the shareholders. I see
no reason why in a situation like the present the company cannot bring matter
so to a head and cut the Gordian Knot, as well as protect the right of their
shareholders by obtaining a decree from the court that will compel the vendor to
initiate procedure under the articles.
In re Copal
Varnish Co. Ltd. was much relied on by the defenders. I find nothing in it that
directly touches the issue here. But there are dicta of Eve J. which appear to
me to tell against the defenders. It hardly needs authority that a step in an
onerous transfer of shares is a contract of sale, but Eve J. went out of his
way to emphasise that fact, and I see little reason to think that he would have
said that a contract to sell shares did not evidence a desire to sell the
shares. I quote only one passage from his judgment which is much is much in
point here : "so long as prior to the completion of the transaction an
opportunity is given to the directors sitting as a board to determine whether
the proposed transfer is a person whom they are prepared to admit as a member
of the company, the conditions imposed by the article are, in my opinion,
complied with, and the contract into which the vendor on becoming a
shareholders entered with his co-shareholder is sufficiently dicharged."
That case was concerned with the consent of directors under a company's article
to transfer of shares. But mutates mutandis it can equally be applied to the
contract which the defenders made here with their co-shareholders when they became
members of the company and bound themselves to observe the conditions of
article 9.
In the
circumstances, I think the pursuers averments and the admissions of the
defenders are relevant to infer desire of the defenders to transfer their
ordinary shares for an onerous consideration within the meaning of article 9.
In my opinion, the defenders first plea in law should be repelled, the pursues'
sixth plea in law should be sustained and an appropriate decree within the
conclusions of the summons should be pronounced. I agreed with the form of
order proposed by my noble and learned friend, Lord Reid.
I would
accordingly allow the appeal.
My Lords, in
the case of Lyle & Scott Ltd. v. British Investment Trust Ltd. I can see no
material distinction between this case and the case of Scott's Trustees in
which judgment has just been given. The same result must follow and a similar
order be made. I would allow the appeal.
LORD SOMERVELL
OF HARROW. My Lords, I agree.
Appeal
allowed.
[1975] 45 COMP. CAS. 43
SUPREME COURT OF
v.
Pranlal Jayanand Thakar
M.H.
BEG AND R.S. SARKARIA, JJ.
CIVIL APPEAL NO. 2515 OF 1972
JULY
17, 1974
S.T.
Desai, H.S. Parihar and I.N. Shroff for the Appellant.
M.C.
Bhandare, P.H. Parekh and Miss Manju Jetley for the Respondent.
Beg,
J.—This appeal,
after certification by the Gujarat High Court of fitness of the case for it,
arises in the following circumstances:
Uttamram
Mayaram Thakar, a flourishing lawyer, made a will, on June 10, 1945, and died
childless on August 20, 1946. His widow, Bai Rukmani, obtained, under the will,
inter alia, certain shares, the right and title to which are disputed before
us. On March 6, 1948, Bai Ruxmani executed a registered gift deed purporting to
donate the disputed shares in various limited companies, of which details were
given in the gift deed, to her brother, Vasudev Ramchandra Shelat, the
appellant before us (hereinafter referred to as "Shelat") On April
18, 1948, Bai Ruxmani also expired. But, before she died, she had signed
several blank transfer forms, apparently intended to be filled in by the donee
so as to enable him to obtain the transfer of the donated shares in the
registers of the various companies and share certificates in his own name. She
had put her signatures in the correct places showing that she meant to sign as
the transferor of the shares. The shares could not, however, be transferred in
the registers of the various companies, in accordance with the relevant
provisions of company law, before the lady's death. Therefore, the respondent
before us, Pranlal Jayanand Thakar, a nephew of late Uttamram Mayaram Thakar,
disputed the claim of the appellant, Vasudev Ramchandra Shelat, to these shares
in an administration suit which came up before a learned judge of the Gujarat
High Court in second appeal together with other matters. The learned single
judge held that Shelat was entitled to the shares covered by the registered
gift deed to which the blank transfer forms could be related but not to others
said to have been orally gifted with which we are not concerned here. The
learned judge having granted leave to file a Letters Patent Appeal, a Division
Bench of the Gujarat High Court, which considered the rival claims, reversed
the decision of the learned single judge even with regard to the shares covered
by the registered gift deed on the ground that the gift was incomplete for
failure to comply with the formalities prescribed by the Companies Act for
"transfer" of shares. It held that there was no equity in favour of
Shelat so that he may claim a right to complete what was left incomplete by the
donor in her lifetime even though there could be no doubt that Bai Ruxmani had
intended to donate the shares to Shelat.
We
think Mr. S.T. Desai, learned counsel for the appellant, Shelat, rightly
pointed out that every material finding on questions of fact, given in favour
of the appellant, was upheld by the Division Bench. After indicating the terms
of the gift deed, the Division Bench held:
"Thus,
it is undoubtedly true that the deed of gift discloses a clear and unequivocal
intention on the part of Bai Ruxmani that Vasudev should become the owner of
these shares and he should for all future time enjoy the fruits thereof. It is
a well-settled position in law that unless the gift is completed as required by
law, mere intention to make a gift cannot pass any title to the donee and does not
make the donee the owner of the property gifted by the donor. The registered
gift deed itself cannot create any transfer and so it was not competent to the
donor to divest the title in her merely by the execution of the gift deed. She
was required to execute the regular transfer deeds or instruments of transfer
in favour of Vasudev Shelat and hand them over to the donee, Vasudev Shelat,
together with the share certificates."
It
went on to say:
"The
circumstances as they clearly emerge and the facts as found by the courts
below, go to show that the deed of gift was executed on March 6, 1948, and, at
the same time, the relevant share certificates were handed over by the donor to
the donee; and, some time between March 6, 1948, when the gift deed was executed,
and April 18, 1948, when Bai Ruxmani died, blank transfer forms signed by Bai
Ruxmani were handed over by Bai Ruxmani to Vasudev Shelat, the donee."
The
appellant's submissions, on facts found, may be summarised as follows:
(1) As between the donor and the donee
the transfer was complete with the registration of the gift deed; and, as there
was a registered document, even delivery of share certificates to the donee was
not necessary in view of section 122, Transfer of Property Act.
(2) Assuming, without conceding, that
the donor had to do something more than to execute a registered document, this
too was done when the share certificates and the signed "blank
transfer" forms were handed over to the donee by the donor. It did not
matter if the name of the donee and other particulars are wanting in these
blank forms. All necessary particulars of shares involved were expressly
mentioned in the gift deed which specifies and identifies each individual share
meant to be donated. The gift deed and the signed blank forms had to be read
together. The donor had done all that reasonably lay within her power to
complete the donation.
(3) The conduct of the donor, in handing
over the share certificates to the donee and the blank transfer forms, read in
the context of the expressly laid down intentions of the donor in the gift
deed, raised the presumption of an implied authority to fill in the details and
to submit to the companies concerned the forms given by the donor to Shelat
before her death.
(4) There was no evidence whatsoever in
the case to repel the irresistible inference of an implied authority given to
the donee to fill in and submit the transfer forms so as to obtain the
necessary entries in the registers of the various companies concerned.
(5) The Division Bench had, after giving all the necessary
findings of fact in favour of the appellant, misdirected itself by resorting to
the doctrine that there is no equity to complete an incomplete transaction, as
there is when a bona fide purchaser for value comes before the court. There was
no question of any equity involved here. The simple question was one of fact:
Did the inference of an implied authority of the donee to fill in the forms and
take other steps necessary to get his name entered in the registers of shareholders
arise or not? Instead of considering and deciding whether such an inference
arose, the Division Bench had failed to decide the real issue on the erroneous
view that equity debars it from inferring an implied authority because the
donee, unlike a bona fide purchaser for value, had paid nothing for the rights
he could get from the donor.
All
that could be urged on behalf of the respondent may be summed up as follows:
(1) The facts found make out, at best, an intention of Bai
Ruxmani to donate but not the completion of a donation required by law for
divesting the donor of interest in the property under consideration which
consisted of shares.
(2) Although shares are "goods" as defined by the
Sale of Goods Act, yet they are "goods" of a special kind. Their
transfer is not completed merely by the execution of a registered document or
by delivery, but the correct mode of transfer is determined by the character of
these "goods". Section 123 of the Transfer of Property Act lays down
only a general mode of transfer by gift for goods in general but not for the
transfer by gift of shares which are a special type of "goods"
capable of transfer only in accordance with a special mode prescribed by the
Companies Act of 1913, which was applicable at the relevant time. In other
words, an adoption of the prescribed form of transfer is of the essence of a
transfer for all purposes and not merely as between the shareholder and the
company concerned.
(3) Sections 122 and 123 of the Transfer of Property Act had
to be read harmoniously with sections 28 and 34 of the Companies Act, 1913.
(4) Since material portions of the transfer form given in
regulation 19 of Table A of the First Schedule of the Companies Act of 1913
were never filled in, the doctrine of "substantial compliance" with
the required form could not come to the aid of the applicant.
(5) The gift deed itself does not empower the donee to take
any of those steps which remained to be taken to complete the
"transfer" so that the doctrine of implied authority would be excluded
by the express terms of the gift deed which not only do not confer any such
authority upon the donee but indicated that the donor was to take the necessary
steps herself.
(6) Inasmuch
as acceptance of the gift "during the lifetime of the donor" is a
condition precedent to the validity of the gift as a transaction, and the
appellant, Shelat, did not apply for the transfer of shares, so as to indicate
his acceptance of the gift before the donor died, the purported donation was
frustrated by reason of section 122 of the Transfer of Property Act.
(7) Even if we were to assume that the
facts proved disclosed that the appellant donee was armed with an implied
authority to obtain a transfer, yet that authority, not having been acted upon
during the life time of the donor, lapsed with the donor's death. The result
was that the donation, even if intended, was imperfect or infructuous in the
eye of law and could not be perfected or completed. Equity does not aid a
merely purported donee who has given no consideration to obtain any right. In
other words, equitable considerations would not be irrelevant in deciding the
question before us.
(8) Even apart from equity, under the
law of agency, found in section 201 of our Contract Act, the principal's death
terminates the agency, so that that doctrine of implied authority does not help
the appellant.
(9) Section 202 of the Contract Act
could not apply to a case where the subject-matter of the alleged agency is the
taking of steps to complete a transfer and not the rights which could only
accrue after the necessary steps are taken. Hence, the appellant-donee could
not be said to have an interest in the "subject matter of the agency"
which is distinct from rights which could have arisen if the object of the
agency had been fulfilled.
(10) Section 202 of the Contract Act could
apply to a case where an agent has an actual or existing interest in the
subject-matter of the agency. Even if the subject-matter of the agency could be
said to be "property", consisting of shares, there could be no
question of applying section 202 of the Contract Act before an
"interest" in the shares arose. Such "interest" could only
arise after a completed transfer.
(11) Section 202 of the Contract Act
contemplated cases of termination of agency in ways other than death. It meant
that, so long as a principal is alive, he could not terminate an agency so as
to injure the interests of the agent in "the subject-matter of the
agency". But, in the case of the death of the principal, the relationship
terminated ipso facto or automatically by death.
(12) A resort to the very concept of agency
in this case presupposes that some interest of the principal or the donor in
the property said to be donated continued, or, in other words, the
assumption-behind it was that the donation of shares was not complete in the
eye of law. Its completion was not possible after the death of the donor.
We think that questions to
be really decided in the case before us have tended to become needlessly
clouded by reference to statutory provisions and to doctrines or concepts which
really operate in separate and distinct fields of their own. It is true that
the relevant provisions of the Transfer of Property Act and the Companies Act
must be interpreted harmoniously. But this certainly does not mean that a
provision of one Act could be nullified by any provision of the other Act. It
means that the provisions of the two Acts should be read consistently with each
other so far as it is reasonably possible to do so. We think that this end can
be best achieved here by examining the objects and the subject-matter of each
enactment and by viewing each relevant provision as a limb of an integrated
whole meant to serve the underlying purposes. In this way. their separable
spheres of operation will be clarified so as to avoid possibilities of conflict
between them or any unnecessary overflow of what really appertains to one field
into another.
No doubt the Transfer of
Property Act is not exhaustive. It does rot deal with every kind of transfer of
property which the law permits. Nor does it prescribe the mole for every
legally recognised transfer. Nevertheless, it is an enactment meant for
defining certain basic types of transfer and it lays down the requirements both
of substance and of form for their legal recognition and effectiveness. Section
5 of this Act gives a wide connotation to "transfer of property". All
that it requires is that the transferor must be living at the time of the
transfer recognised by the Act. Section 6 of the Act lays down that
"property of any kind may be transferred" subject to certain
exceptions. Shares in a company are certainly a form of property. Section 28 of
the Companies Act, 1913, says that they "shall be movable property,
transferable in the manner provided by the articles of the company". Both
sides accept as correct the view of the Division Bench of the High Court that
the shares are "goods" within the meaning of the Sale of Goods Act.
The point which, however, deserves to be noted here is that the wide definition
of "property" in section 6 of the Transfer of Property Act includes
not merely shares as transferable, movable property, but would cover, as a
separable form of property, a right to obtain shares which may be antecedent to
the accrual of rights of a shareholder upon the grant of a share certificate in
accordance with the articles of association of a company.
In
Maneckji Pestonji Barucha v. Wadilal Sarabhai & Co.,
which was a case of handing over share
certificates together with blank signed transfer forms, the Privy Council said:
"But, further, there
seems to their Lordships a good deal of confusion arising from the prominence
given to the fact that the full property in shares in a company is only in the
registered holder. That is quite true. It is true that what Barucha had was not
the perfected right of property, which he would have had if he had been the
registered holder of the shares which he was selling. The company is entitled
to deal with the shareholder who is on the register, and only a person who is
on the register is in the full sense of the word owner of the share. But the
title to get on the register consists in the possession of a certificate, together
with a transfer signed by the registered holder. This is what Barucha had. He
had the certificates and blank transfers, signed by the registered holders. It
would be an upset of all Stock Exchange transactions if it were suggested that
a broker who sold shares by general description did not implement his bargain
by supplying the buyer with certificates and blank transfers, signed by the
registered holders of the shares described. Barucha sold what he had got. He
could sell no more. He sold what in England would have been choses-in-action,
and he delivered choses-in-action. But, in India, by the terms of the Indian
Contract Act, these choses-in-action are goods. By the definition of goods as
every kind of movable property it is clear that not only registered shares, but
also this class of choses in action, are goods. Hence, equitable considerations
not applicable to goods do not apply to shares in India."
Thus, we find that in
Barucha's case
a distinction was made between "the title to get on the register" and
"the full property in the shares in a company." The first was held to
have been acquired by mere delivery, with the required intention, of the share
certificate and a blank form signed by the transferor. The second is only
obtained when the transferee, in exercise of his right to become a shareholder,
gets his name on the register in place of the transferor. This antecedent right
in the person to whom the share certificate is given with a signed blank
transfer form under a transaction meant to confer a right or title upon him to
become a shareholder, is enforceable so long as no obstacle to it is shown to
exist in any of the articles of association of a company or a person with a
superior right or title, legal or equitable, does not appear to be there. We
think that section 6 of the Transfer of Property Act justifies such a splitting
up of rights constituting "property" in shares just as it is well
recognised that rights of ownership of a property may be split up into a right
to the "corpus" and another to the "usufruct" of the
property and then separately dealt with.
Section 122 of the Transfer
of Property Act defines a "gift", Its substantial requirements are:
(1) the donor must transfer "property", which is the subject-matter
of the gift, voluntarily and without consideration; and (2) the donee must
accept it during the lifetime of the donor or while the donor's competence to
give exists. Section 123 of the Transfer of Property Act prescribes the mode of
transfer by gift. It lays down that "the transfer may be effected either
by registered instrument signed by the donor and attested by at least two
witnesses or by delivery". No special mode of delivery is specified. On
the other hand, it is indicated that the delivery "may be made in the same
way as the goods sold are delivered".
In the case before us, the
registered document was signed by the donor as "the giver" as well as
by the donee, as "the acceptor" of the gift, and it is attested by
six witnesses. In it, the donor specified and gave particulars of the shares
meant to be gifted and undertook to get the name of the donee put on to the
registers of the companies concerned. The donor even said that she was,
thenceforth, a trustee for the benefit of the donee with regard to the income
she may get due to the fact that her name was still entered in the registers of
the companies concerned as a shareholder. The donor delivered the registered
gift deed together with the share certificates to the donee. We think that, on
these facts, the donation of the right to get share certificates made out in
the name of the donee became irrevocable by registration as well as by
delivery. The donation of such a right, as a form of property, was shown to be
complete so that nothing was left to be done so far as the vesting of such a
right in the donee is concerned. The actual transfers in the registers of the
companies concerned were to constitute mere enforcements of this right. They
were necessary to enable the donee to exercise the rights of the shareholder.
The mere fact that such transfers had to be recorded in accordance with the
company law did not detract from the completeness of what was donated.
We think the learned
counsel for the appellant rightly contended that, even in the absence of
registration of the gift deed, the delivery of the documents mentioned above to
the donee, with the clear intention to donate, would be enough to confer upon
the donee a complete and irrevocable right, of the kind indicated above, in
what is movable property. He relied upon Kalyanasundaram Pillai v. Karuppa Mooppanar,
Venkat Subba Srinivas Hedge v. Subba Rama Hedge
and Firm Sawan Mal Gopi Chand v. Shiv Charan Das.
The requirements of form or
mode of transfer are really intended to ensure that the substantial
requirements of the transfer have been satisfied. They subserve an object. In
the case before us, the requirements of both section 122 and section 123 of the
Transfer of Property Act were completely met so as to vest the right in the
donee to obtain the share certificates in accordance with the provisions of the
company law. We think that such a right is in itself "property" and
separable from the technical
legal ownership of the shares. The subsequent or "full rights of
ownership" of shares would follow as a matter of course by compliance with
the provisions of company law. In other words, a transfer of
"property" rights in shares, recognised by the Transfer of Property
Act, may be antecedent to the actual vesting of all or the full rights of
ownership of shares and exercise of the rights of shareholders in accordance
with the provisions of the company law.
The
Companies Act of 1913 was meant "to consolidate and amend the law relating
to trading companies and other associations". It is concerned with the
acts and proceedings relating to the formation, running, and extinction of
companies, with rights, duties, and liabilities of those who are either members
or officers of such companies, and of these who deal with companies in other
capacities. Its subject-matter is not transfer of property in general. It deals
with transfers of shares only because they give certain rights to the legally
recognised shareholders and imposes some obligations upon them with regard to
the companies in which they hold shares. A share certificate not merely
entitles the shareholder whose name is found on it to interest on the share
held but also to participate in certain proceedings relating to the company
concerned. It is for this purpose that section 34 of the Companies Act, 1913,
enables the making of "an application for the registration of the transfer
of shares in a company.....either by the transferor or the transferee". A
share certificate is a prima facie evidence, under section 29 of the Act, of
the title to a share. Section 34 of the Act does not really prescribe the mode
of transfer but lays down the provisions for "registration" of a
transfer. In other words, it presupposes that a transfer has already taken
place. The manner of transfer of shares, for the purposes of company law, has
to be provided, as indicated by section 28, by the articles of the company, and,
in the absence of such specific provisions on the subject, regulations
contained in Table "A" of the First Schedule of the Companies Act
apply.
Table
"A" of the First Schedule to the Companies Act of 1913 gives
regulation 19 as follows:
"19.
Shares in the company shall be transferred in the following form, or in any
usual or common form which the directors shall approve : A.B. of…………..in
consideration of the sum of rupees…………paid to me by C.D. of (hereinafter called
'the said transferee'), do hereby transfer to the said transferee the share (or
shares) numbered in the undertaking called the Company, Limited, to hold unto
the said transferee, his executors, administrators and assigns, subject to the
several conditions on which I held the same at the time of the execution
thereof, and I (the said transferee) do hereby agree to take the said share (or
shares) subject to the conditions aforesaid. As witness our hands the………….day of………….Witness to the signature of, etc."
Apparently, the form given
here is only for sales. In the case of a gift the more general provisions of
regulation 18 would apply. This regulation says:
"The instrument of
transfer of any share in the company shall be executed both by the transferor
and transferee, and the transferor shall be deemed to remain holder of the
share until the name of the transferee is entered in the register of members in
respect thereof."
We find from the gift deed
that both the donor and the donee have signed the document, under two headings,
respectively: "giver of the gift" and "acceptor of the
gift". Hence, we think that the broadly indicated requirements of
regulation 18 were also complied with by the contents of the gift deed. It is
immaterial that the gift deed deals with a number of items so long as the
requirements of regulation 18 are fulfilled. After all, the observance of a
form, whether found in the Transfer of Property Act or in the Companies Act, is
meant to serve the needs of the substance of the transaction which were
undoubtedly shown to have been completely fulfilled here. There is nothing in
regulation 18 or anywhere else in our company law to indicate that, without
strict compliance with some rightly prescribed form, the transaction must fail
to achieve its purpose. The subservience of substance of a transaction to some
rightly prescribed form required to be meticulously observed savours of archaic
and outmoded jurisprudence.
Buckley on the Companies
Acts (XIII-edn., p. 813) was cited before us for the proposition that "non
registration of a transfer of shares made by a donor does not render the gift
imperfect". Considerable argument was advanced by both sides on the
correct interpretation of the leading English case mentioned there: In re Rose: Midland Bank Executor
& Trustee Co. Ltd. v. Rose,
where Jenkins J., after an exhaustive discussion of the English case law on the
subject, held that, when a testator had done everything that lay in his power
to divest himself of his rights in preference shares "completion of the
legal title by registration could only be the act of a third party which did
not affect the efficacy of the gift of shares inter vivos". The Court of
Appeal upheld this decision in In re Rose : Rose v. Inland Revenue Commissioners .
It held that "the deceased was in the
position of a trustee of the legal title in the shares for the
transferees", pending the entry of the names of the donees in a company's
register and the issue of share certificates to them. In the case before us, we
find that Bai Rukmani had actually stated in the gift deed that her position
vis-a-vis the donee, who had accepted the gift, was that of a trustee for the
benefits received by her from the gifted shares until the completion of the
legal formalities so that appropriate entries are made in the registers of
companies concerned and fresh share certificates are issued to the donee. We, therefore,
think that this case helps the appellant.
In
Howrah Trading Co. Ltd. v. Commissioner of Income-tax,
considering a case of blank transfers, Hidayatullah
J., speaking for this court, said :
"In such blank
transfers, the name of the transferor is entered, and the transfer deed signed
by the transferor is handed over with the share scrip to the transferee, who,
if he so chooses, completes the transfer by entering his name and then applying
to the company to register his name in place of the previous holder of the
share. The company recognises no person except one whose name is on the
register of members, upon whom alone calls for unpaid capital can be made and
to whom only the dividend declared by the company is legally payable. Of
course, between the transferor and the transferee, certain equities arise even
on the execution and handing over of 'a blank transfer', and among these
equities is the right of the transferee to claim the dividend declared and paid
to the transferor who is treated as a trustee on behalf of the transferee.
These equities, however, do not touch the company, and no claim by the
transferee whose name is not in the register of members can be made against the
company, if the transferor retains the money in his own hands and fails to pay
it to him."
This case also makes a
distinction between an antecedent right and title of the transferee under a
blank transfer and the fully blossomed rights and title of such a transferee
after the due registration of a transfer.
Another case cited before
us was R. Subba Naidu v. Commissioner of Gift-tax,
where a distinction was made between a transfer of the antecedent right to the
shares which operated with full force between a donor and the donee,
"notwithstanding that vis-a-vis the company, the donor continued to be
holder of the shares in the absence of transfer of shares". In other
words, the fields of operation of the provisions of sections 122 and 123 of the
Transfer of Property Act and the provisions of the Companies Act, 1913, were
different. Each had different objects and legal consequences. The Companies Act
did not prevent the completion of a gift of the right to obtain the shares
which could, in common parlance or loosely speaking, be spoken of as a gift of
shares themselves even before the gift is acted upon so that the donee obtains
share certificates in his own name. The Transfer of Property Act could not
enable the donee to exercise the rights of a shareholder vis-a-vis the company,
until a transfer of shares is made in accordance with the company law.
Other cases cited on behalf
of the appellant, which we will only mention without discussion, were : Colonial Bank v. Hepworth ,
In re Tahiti Cotton Company: Exparte Sargent,
In re Letheby & Christopher Ltd.,
In the matter of Bengal Silk Mills Co. Ltd.,
Bank of Hindustan Ltd. v. Kowtha Suryanarayana Rao ,
Arjun Prasad v. Central Bank of India Ltd.,
Binode Kishore Goswami v. Asutosh Mukhopadhya and Amarendra Krishna Dutt v. Monimunjary Debi
.
Learned counsel for the
respondent cited the following passage from Palmer's Company Law (21st edition—1968,
page 334):
"A transfer is
incomplete until registered. Pending registration, the transferee has only an
equitable right to the shares transferred to him. He does not become the legal
owner until his name is entered on the register in respect of these
shares."
This statement of the law
in England is correct. The transferee, under a gift of shares, cannot function
as a shareholder recognised by company law until his name is formally brought
upon the register of a company and he obtains a share certificate as already
indicated above. Indeed, there may be restrictions on transfers of shares
either by gift or by sale in the articles of association. Thus, we find in
Palmer's Company Law (at page 336):
"There is nothing to
limit the restrictions which a company's articles may place on the right of
transfer. The articles may give the directors power to refuse to register a
transfer in any specified cases; for instance where calls are in arrear, or
where the company has a lien on the shares—and some such provisions are usually
inserted. Thus, article 24 provides that the directors may decline to register
any transfer of a share (not being a fully paid share) to a person of whom they
do not approve, and may also decline to register any transfer of shares on which
the company has a lien. But the articles in many cases go far beyond this. They
may prohibit, for example, the transfer of a share to a person who is not a
member of a specified class, or provide, as they often do in private companies,
that before transferring to an outsider the intending transferor must first
offer the shares to the other members, and give them a right of pre-emption.
Such provisions, though permanent, do not contravene the rule against
perpetuities."
In the type of cases
contemplated above, where there are special restrictions on the transfer of
shares imposed by the articles of association, the difficulty or defect is inherent in the character of
such shares. In such cases, the donee or purchaser cannot get more than what
the transferor possesses. Therefore, in such cases, it is possible to hold that
even the right and title to obtain shares, which we have viewed as separable
from the legal right and title to function as a shareholder, is incomplete
because of a defect in the nature of shares held, due to some special
restrictions on their transferability under the articles of association of the
company concerned. But such is not shown to be the case at all with any of the
shares which formed the subject-matter of the gift in favour of Shelat. Hence,
in our opinion, cases which deal with inchoate rights to shares do not assist
the respondent because at least a gift of the right to obtain the transfer of
shares in the books of the companies concerned was shown to be complete on the
terms of the gift deed of Bai Ruxmani coupled with the handing over of the
share certificates and the subsequent signing of the blank transfer forms. It
was not a case of a bare expression of an intention to donate. The donor had
done everything which she could reasonably be expected to do to divest herself
of her rights in the shares donated.
Ireland
v. Hart ,
relied upon by the respondent, was a case in which a prior equitable title of a
wife, for whom the husband was a trustee, took precedence over the claim of a
subsequent mortgagee. This case was cited in Palmer's Company Law as an
instance of how delay in registration may endanger the claims of a transferee
when some already existing prior equity comes to light. In upholding the wife's
claim of a prior equitable right the court said (at page 529):
"It
is established by Societe Generale de Paris v. Walker ,
Roots v. Williamson and Moore v. North Western Bank
that, where the articles are in the form in which they are in the present case,
a legal title is not acquired as against an equitable owner before
registration, or at all events until the date when the person seeking to
register has a present absolute and unconditional right to have the transfer
registered. I am not called upon to define the meaning of a ' present absolute
and unconditional right, 'but, as it appears to me, I am not sure that anything short
of registration would do except under very special circumstances. At all
events, I am of opinion that in this case, prior to the date of the injunction,
the defendant, Hart, had not a 'present absolute and unconditional right' to
the registration of the transfer of these shares, and that the prior equitable
right of the plaintiff, Mrs. Ireland, must prevail."
Thus,
what was disputed there was the right to obtain registration of a transfer of
shares. The husband's power to mortgage was itself circumscribed by his
position as a trustee.
It was also pointed out in
Palmer's Company Law (at page 334):
"It has never been
clearly decided in what circumstances the 'present, absolute, unconditional
right to have the transfer registered', to which Lord Selborne refers, arises.
It is thought that in many instances the test is that indicated by Jenkins J.
in In re Rose :
'I was referred on that to
the well known case of Milroy v. Lord and also to the recent case of In re Fry : Chase National
Executors & Trustees Corporation v. Fry .
Those cases, as I understand them, turn on the fact that the deceased donor had
not done all in his power, according to the nature of the property given, to
vest the legal interest in the property in the donee. In such circumstances it
is, of course, well-settled that there is no equity to complete the imperfect
gift. If any act remained to be done by the donor to complete the gift at the
date of the donor's death, the court will not compel his personal
representatives to do that act and the gift remains incomplete and fails."
In Milroy v. Lord the imperfection was due to the fact that the
wrong form of transfer was used for the purpose of transferring certain blank
shares. The document was not the appropriate document to pass any interest in
the property at all. In In re Fry the flaw in the transaction, which was a
transfer or transfers of shares in a certain company, was failure to obtain the
consent of the Treasury which, in the circumstances surrounding the transfers
in question, was necessary under the Defence (Finance Regulations) Act, 1939,
and, as appears from the head-note, what was held was that the donor's
executors ought not to execute confirmatory transfers.... In this case, as I
understand it, the testator had done everything in his power to divest himself
of the shares in question to Mr. Hook. He had executed a transfer. It is not
suggested that the transfer was not in accordance with the company's
regulations. He had handed that transfer together with the certificates to Mr.
Hook. There was nothing else the testator could do Therefore, it seems to me
that the present case is not in pari materia with the two cases to which I have
been referred. The real position, in my judgment, is that the question here is
one of construction of the will. The testator says: ".... if such
preference shares have not been transferred to him previously to my
death". The position was that, so far as the testator was concerned, they
had been so transferred:
Respondent's learned
counsel also relied on In re Fry : Chase National Executors & Trustee Corpn.
Ltd. v. Fry ,
which has been referred to by Jenkins J. in
the passage quoted above. In that case, apart from other distinguishing
features, the flaw in the purported transfer was that it contravened the
Defence (Finance Regulations) Act, 1939, which prohibited an acquisition of interest in the
shares without a licence from the Treasury. Hence, the purported transfer was
really illegal. No such illegality is shown to exist in the case before us.
Respondent's
learned counsel cited Amarendra Krishna Dutt v. Monimunjary Debi ,
where, after a husband had executed a document in favour of his wife, the
parties had done nothing to get the transfer registered for nearly two years
during which the dividend was received sometimes by the wife and sometimes
retained by the husband with the permission or implied consent of the wife. The
court held that the purported gilt being an intended "transfer" only
could not operate as a "declaration of trust". Another ground for the
decision was that "the disposition of the shares failed as being an imperfect
voluntary gift". Here, the Calcutta High Court purported to follow Milroy
v. Lord and Richards v. Delbridge .
No such facts are present in the case before us. Moreover, we seriously doubt
the correctness of this decision of the Calcutta High Court. It seems to
conflict with the law declared in the cases cited by the appellant which we
approve.
Another
case relied upon by the respondent was Bank of Hindustan Ltd. v. Kowtha
Suryanarayana Rao,
where the court refused to direct rectification of a register of members
because the articles of association vested an absolute discretion in the
company to recognise or refuse to recognise a transfer. The company's consent
to a transfer had been refused because the company did not accept the
correctness of the form of transfer deeds. In other words, this was a case in
which the provisions of the articles of association stood in the way of
rectification of the register-Such is not the case before us.
The
result is that we do not think that the respondent has made out a case for
defeating the clearly expressed intentions of the donor coupled with the
authority with which the donee was armed by reason of the signed blank transfer
forms. We think that the implied authority was given with regard to a
subject-matter in which Shelat had acquired an interest. On a correct
interpretation of the gift, deed and the other facts mentioned above, we are of
opinion that the right to obtain transfer of shares was clearly and completely
obtained by the donee-appellant. There was no question here of competing
equities because the donee-appellant was shown to have obtained a complete
legal right to obtain shares under the gift deed and an implied authority to
take steps to get his name registered. This right could only be defeated by showing
some obstacle which prevented it from arising or which could defeat its
exercise. No such obstacle having been shown to us to exist, the rights of the
donee-appellant would prevail as against any
legal rights which could have accrued to others if the donee had not already
acquired the legal right which, as held by us above, had become vested in him.
We, therefore, allow this
appeal with costs and set aside the judgment and decree of the Division Bench
of the High Court and restore that of the learned single judge.
Appeal
allowed.
[2001] 31 scl 178 (ap)
High
Court of Andhra Pradesh
v.
Mallina Bharathi Rao
J.
CHELAMESWAR, J.
COMPANY APPEAL NO. 1
OF 2001
FEBRUARY 26, 2001
Section 108 of the Companies Act, 1956 -
Transfer of shares - Registration of - First respondent was shareholder of
company - In EOGM of company articles of association were amended to effect
that if 90 per cent shareholders decided that a member shall cease to be a
member by special resolution in general body meeting, membership of such
shareholder shall stand cancelled immediately and such shareholder shall
transfer his share to other existing shareholders - According to company, first
respondent made number of baseless complaints to various authorities merely
to harass management and drag company into unnecessary litigation and,
therefore, by virtue of resolution approved in EOGM it was decided that first
respondent would cease to be member of company and her shares would be acquired
by other existing shareholder - First respondent protested against such
communication - Subsequently, by other communication, she was informed that
Board of Directors authorised one of directors to act as her agent and execute
transfer deed for shares held by her in favour of one existing shareholder at
book value and total value of shares was sent to first respondent by way of
demand draft - Whether fact that provision for compulsory transfer of shares of
one of members against his consent was not there originally in articles of
association but was included subsequently by an amendment of articles of
association made no difference insofar as its legality was concerned if
company could provide such articles at inception or prior to entry of such
members - Held, yes - Whether requirement that only transferor should execute
instrument is absolute - Held, no - Whether such execution could be on behalf
of transferor if it is authorised by transferor or by law - Held, yes - Whether
therefore, when articles of association authorised execution of instrument of
transfer by one of directors in contingencies contemplated therein, it would be
incorrect to say that transfer of shares in question was in contravention of
section 108 - Held, yes - Whether, however, such a compulsory transfer must be
in interest of company but not for benefit of some of shareholders even if they
are majority shareholders - Held, yes - Whether, therefore, since there was no
material to hold that decision of company to expel first respondent was with
any reasonable prospects of advantage to company as a whole nor was it
established that all activities of first respondent in sending various
complaints resulted in any tangible damage to company, action of company in
cancelling membership of first respondent must be held to be illegal - Held,
yes
The first respondent was shareholder of the
first appellate company. Article 13 of articles of association of the first
appellant company provided that if in any case the proposing transferor after
having become bound, made default in transferring share, the company might
receive purchase money and the proposing transferor would be deemed to have
appointed any one director as his agent to execute a transfer of the shares to
the purchasing Member and upon the execution of such transfer the company would
hold purchase money in trust for the proposing transferor. On 30-10-1999, in an
EOGM of the company, the articles of association of the company were resolved
to be amended and amended articles provided that in the event of the 90 per
cent shareholders in number so decided that a member shall cease to be a member
by a special resolution in a general body meeting, the membership of such
shareholder shall stand cancelled immediately and such shareholder shall
transfer his share to any other individual who was an existing member of the
company following the procedure laid down in articles 9 to 13. The first
respondent was informed that by virtue of a resolution approved in an EOGM the
first respondent ceased to be a member of the company and consequently her
shares would be acquired by one of the existing shareholders of the company,
and, therefore, the first respondent was called upon to surrender the share
certificates. The first respondent protested against such communication
indicating that she was not willing to transfer the shares. Subsequently, by
another communication the first respondent was informed that the Board of
directors authorised a director of the company to act as her agent and execute
the transfer deeds for the shares held by her in favour of one of the existing
shareholders at book value and in pursuance of the transfer deed the transfer
of the shares was effected in the company records. The total value of the
shares was received by the company and the same was sent to the first
respondent by way of a demand draft. In the explanatory statement appended to
the notice of the EOGM held on 30-11-1999, wherein the decision to cancel the
membership of the first respondent was taken, it was stated that the first
respondent made a number of baseless and frivolous complaints to various
authorities such as Income-tax department, Banks, etc., merely with a view to
hinder and obstruct the smooth day-to-day function of the company and harass
the management and was dragging the company into unnecessary litigation, that
the management had patiently endured all the troubles for the past few years in
the hope that she would change but as things were getting worse, they decided
to she should cease to be member of the company. The CLB allowed the petition
of the first respondent holding that the action of the appellants in
transferring the shares of the first respondent was in contravention of the
mandatory provisions of section 108.
On appeal :
The articles of association of the company are
in the nature of a contract though the exact nature of contract is very
difficult to define between the company and its shareholders and the members
inter se, stipulating the terms on which a person becomes a member of the
company. In other words the rights and liabilities of the members of a company
are regulated by the articles of association. Obviously, a person, on becoming
the member of the company, agrees to be bound by such a contract.
But in the instant case, the provision for
compulsory transfer of shares of one of the members against the member’s
consent was not there originally in the articles of association; but included
subsequently by an amendment of the articles of association. The alteration of
the articles of association is permitted under section 31. Sub-section (2) of
section 31 declares that the alteration so made shall be as valid as if
originally contained in the articles of association subject, of course, to the
provisions of the Companies Act. Therefore, the fact that the amended articles
provided for compulsory transfer of the shares against the wishes of some of
the existing members of the company, did not make any difference insofar as
it’s legality was concerned, if the company could provide such articles at the
inception or prior to the entry of such of the members.
The requirement that only the transferor
should execute the instrument of transfer is not absolute. More particularly in
view of the language of section 108. Such an execution could be on behalf of
the transferor if it is authorised either by the transferor or by law. The
unamended article 13 authorised the execution of the instrument of transfer by
one of the directors in the contingencies contemplated therein. The amended
article 16C adopted the same procedure for the cases covered under articles 16A
and 16B. Therefore, it could not be said that the transfer of the shares in
question was in contravention of section 108. To that extent, the decision of
the CLB must be held to be bad.
Coming to the question whether the decision of
the company to cancel the membership of the first respondent was a bona fide
decision or not, the principles of law in this regard is that such a compulsory
transfer must be in the interests of the company, but not for the benefit of
some of the shareholders even if they are the majority shareholders.
Unfortunately, the CLB had not examined this aspect. From the explanatory
statement under section 173(2) appended to the notice of the Extraordinary
General Meeting dated 30-11-1999, it appeared, that the first respondent and
her husband were making complaints against the functioning of the company to
the various authorities like the income-tax authorities and banks. Those complaints
were resulting in proceedings before the authorities where the company had to
defend itself. Nothing was stated that such proceedings were resulting in
detriment to the company as such. Obviously, those who were in the management
of the company felt that all this was an avoidable nuisance.
There was no material on record to hold that
the decision of the first appellant to expel the first respondent shareholder,
was with any reasonable prospect of advantage to the company as a whole nor was
it established that all the activity of the first respondent and her husband in
sending up various complaints resulted in any tangible damage to the company.
In fact, by sending out the first respondent by cancelling her membership,
there was no assurance that the first respondent or her husband would be
stopped from sending the complaints against the company. In the circumstances,
the action of the appellants in cancelling the membership of the first
respondent would achieve no benefit or advantage to the company as a whole;
consequentially, the same must be held to be illegal.
For all the above mentioned reasons, the
reasoning of the CLB in passing the order under appeal was not correct. The
conclusion reached by the CLB was right and there was no reason to interfere
with the same.
Naresh Chandra Sanyal v. Calcutta Stock
Exchange Association Ltd. [1971] 41 Comp. Cas. 51 (SC), Lord Sterndale M.R.
1920 Ch. D. 154, Sidebottom v. Kershaw 1920 Ch. D. 154, Madhava Ramachandra
Kamath v. Canara Banking Corpn. Ltd. [1941] 11 Comp. Cas. 78 (Mad.).
Smt. Mallina Bharathi Rao v. Gowthomi Solvent
Oils Ltd. [2001] 31 SCL 60 (CLB) affirmed (reasons not approved).
1. This
is an appeal preferred under section 10F of the Companies Act, 1956 by the
respondents in C.P. No. 7/111/SRB/2000, dated 29-12-2000 on the file of the
Company Law Board (CLB), Southern Region Bench, Chennai.
2. The
first respondent herein was the petitioner before the CLB in the above
mentioned company petition. She was a shareholder of the first appellant
company herein holding (350) shares. The first appellant company was initially
incorporated as a private limited company on the 22-3-1974. Subsequently, on
15-6-1988 by virtue of the operation of the provisions under section 43A of the
Act, the company became a public limited company.
3. Article
8 of the articles of association of the first appellant company imposes certain
restrictions on the right of the shareholders to transfer the shares (the
details of which may not be necessary for the purpose of this case), except
noting that the right to transfer the shares is not absolute under the articles
of association. Further article 13 reads as follows :
“If in any case the Proposing Transferor,
after having become bound as aforesaid, makes default in transferring the share
the Company may receive the purchase money, and the Proposing Transferor shall
be deemed to have appointed any one Director as his agent to execute a transfer
of the share to the Purchasing Member or person selected as aforesaid, and upon
the execution of such transfer the Company shall hold the purchase money in
trust for the Proposing Transferor. The receipt of the Company for the
purchase-money shall be a good discharge to the purchasing Member or person
selected as aforesaid and after his name has been entered in the register in
purported exercise of the above power the validity of the proceedings shall not
be questioned by any person.”
4. On
30-10-1999, in an Extraordinary General Meeting of the company held at the
registered office of the appellant company, the articles of association of the
company were resolved to be amended; thereby the original article 16 of the company
was renumbered as articles 16A and 16B and 16C were introduced. Accordingly,
the amendments were effected and after the amendment the relevant articles read
as follows :
“16A. The Board of Directors can, in the best
interests of the Company if they thought fit, refuse registration of any
application for transfer. Without assigning any reason for so doing and they
shall give notice of refusal in all such case within one month.
16B. In the event of the 90 per cent
shareholders in number and share capital so decide that a member shall cease to
be a member by a special resolution in a General Body Meeting
(Extraordinary/Annual General Meeting), the membership of such shareholder
shall stand cancelled immediately.
16C. Immediately after passing of the resolution
as stated in article ‘16B’ such shareholder shall transfer his share to any
another individual who is an existing member of the Company following the
procedure laid down in Articles 9 to 13.”
5. By a
letter dated 11-12-1999 signed by the second appellant, herein on behalf of the
first appellant, the first respondent was informed that by virtue of a
resolution approved in an Extraordinary General Body Meeting held on
30-11-1999, the first respondent ceased to be a member of the company with
effect from the said date and consequentially the first respondent’s shares
would be acquired by any one of the existing shareholders of the company as per
the provisions of the articles of association. Therefore, the first respondent
was called upon to surrender the share certificates and also indicate the
price, which the first respondent considers to be the fair value of the shares
and failure on the part of the first respondent to indicate the value of the
shares would enable the first appellant herein to fix the fair market price of
the shares in accordance with the procedure lay down in the articles of
association. The first respondent by its letter dated 14-12-1999 protested
against such communication indicating that he was not willing to transfer the
shares and such a proposal for transfer of shares was illegal. Subsequently, by
another communication dated 9-2-2000 the first appellant informed the first
respondent as follows : (The relevant portion of the said letter reads as
follows)
“This is to inform you that the Board of
Directors by its resolution dated 8-2-2000 authorised Sri B. Sreemannarayana,
a Director of the Company to act as your agent and execute the transfer deed
for the shares being held by you in favour of Sri M. Ramachandra Rao, the
Purchaser at the rate of Rs. 668 per share as decided by the Board which is the
book value per each share. In pursuance of that the transfer deed is executed
by Sri B. Sreemannarayana and the transfer of the shares is effected in the
Company records in favour of Sri M. Ramachandra Rao. The total value of the
shares of Rs. 2,33,800 was received by the company from Sri M. Ramachandra Rao
and the same is herewith sent to you by way of a demand draft drawn on State
Bank of India, Peddapuram bearing No. 797999 for Rs. 2,33,800 (including bank
commission) dated 9-2-2000.
We therefore request you to acknowledge the
same immediately and further request you to surrender the share certificates.”
6. In the
explanatory statement as required under section 173(2) of the Act appended to
the notice of the Extraordinary General Meeting held on 30-11-1999 wherein the
decision to cancel the membership of the first respondent was taken, reads as
follows :
“1. The Company was formed by a group of close relatives in the spirit
of Partnership. However, the conduct of Mrs. Bharati Rao and her husband who is
acting as he representative and proxy have been detrimental and injurious to
the interests of the Company. Despite repeated requests and cautioning they are
continuing to harass the management and acting in a manner prejudicial and
harmful to the interests of the Company.
2. Mrs. Bharati Rao and her husband Mr. Narasimha Rao made a number of
baseless and frivolous complaints to various authorities such as income tax department,
Banks, Department of Company Affairs and Registrar of Companies merely with a
view to hinder and obstruct the smooth day to day function of the Company and
harass the management and is dragging the Company into unnecessary litigation.
Some of the specific instances are as follows :
(a) They have written a letter to the Income-tax department,
Visakhapatnam making false allegation that the Company’s profits have been
siphoned off and brought in as capital by members. The Company has to defend itself.
(b) They have made repeated and baseless complaints to Department
of Company Affairs and Registrar of Companies alleging violation of various
provisions of the Companies Act. The Company has replied to the allegation and
the matters are closed.
(c) They have made complaint to State Bank of India questioning
the sanctioning of the term loan for the ‘Cogeneration Plant’ which is
contributing major profits to the Company. The Company has relied and the
matter is closed.
(d) In addition to the above she made various complaints to
Consumers Court etc., which have also been dismissed.
3. Her false and biased complaints are tarnishing the image of the
Company and lowering its image in the public besides creating unnecessary
suspicions/doubts in the minds of the various authorities regarding bona fide
transactions and business activities of the Company. The acts of Mrs. Bharati
Rao and her husband are detrimental and injurious to the interest of the
Company which is known for professional management and for promoting
shareholders interest and value.
4. She and her husband acting on
her behalf have obtained privileged business information of the Company and
technical details of its operations and other confidential information which
they are passing on to your Company’s competitors in business where Mr.
Narasimha Rao is working and their close relatives have majority stake.
5. She is repeatedly raising trivial issues and loudly protesting
about the insignificant matters and requesting for all inconsequential information
and details on regular basis, thereby distracting and diverting the attention,
time and effort of the management away from the more important business
activity of the Company thereby causing loss to your Company in terms of money,
time and effort.
6. In the Company’s general meeting Mr. Narasimha Rao who has attended
as the proxy of Mrs. Bharati Rao has raised frivolous and unconnected matters
merely to disrupt the proceedings and hinder the Company’s work. This behaviour
is in violation of the section 176 of the Companies Act.
7. The affairs of your Company which is a closely held one are being
given bad publicity by her to outsiders who have no connections whatsoever
with the Company.
The management and the Company have patiently
endured all the troubles/problems and obstructions created by Mrs. Bharati Rao
for the past few years in the hope that she would change and act as a
responsible shareholder in the interest of the Company. However the things are
getting worse.
Hence the above Resolution.”
7. Aggrieved
by the action of the first appellant company in cancelling the membership and
the consequential steps to have the shares of the first respondent transferred
compulsorily in favour of one of the other shareholders, as described above,
the first respondent approached the CLB.
The CLB allowed the company petition of the
first respondent by its order dated 29-12-2000. The substance of the order is
that the action of the appellants herein in transferring the shares of the
first respondent is in contravention of the mandatory provisions of section
108 of the Act. The consequent omission of the name of the first respondent
from the register of the appellant company is without sufficient cause and
therefore directed the first appellant to restore the name of the first
respondent, on the Register of Members.
8. The
learned counsel for the appellant submitted that the decision of the CLB is
illegal as the CLB misdirected itself on the real question involved in the
case. The questions that the CLB ought to have addressed itself are whether the
first appellant company is legally entitled to amend the articles of
association thereby providing the compulsory transfer of the shares of one of
the shareholders in a manner as provided under the amended articles 16A to 16C.
Secondly, if the first appellant company has such a power to amend the articles
of association as mentioned above, whether the power under the amended articles
of association was exercised in accordance with law and the amended articles of
association and bona fide. The learned counsel further argued that, the
decision of the CLB insofar as it held that the transfer of the shares of the
first respondent effected without there being a valid instrument of transfer
illegal, is unsustainable in law as the instrument of transfer is not required
to be executed only by the first respondent-transferor. Under section 108 such
an instrument could be executed either ‘by or on behalf of the transferor’. In
the present case, since it was a case of a compulsory transfer without the
consent of the first respondent, she is not expected to execute such a valid
instrument of transfer and therefore as authorised by the articles of
association one of the directors executed the instrument of transfer.
9. On the
other hand, the learned counsel for the first respondent—Sri V.S. Raju, argued
that the amendment of the articles of association is illegal - for the reasons
that the first respondent’s right to hold the shares is interfered with without
any authority of law and assuming that the amendment such as the one made in
the present case could be made by the company, such amendments were made behind
the back of the first respondent, i.e., without any notice to the first
respondent and therefore the amendments do not bind the first respondent.
10. I must clear up one factual issue before I
proceed to examine the questions of law. Though the question, that the
amendments to the articles of association were made without a proper notice to
the respondent, was raised before the CLB, the CLB did not record any finding
on the same and I do not find any material on record to come to any conclusion
on the question whether such a notice was given to the first respondent or not.
11. The
Supreme Court in Naresh Chandra Sanyal v. Calcutta Stock Exchange Association
Ltd. [1971] 41 Comp. Cas. 51 held as follows :
“. . . Subject to the provisions of the
Companies Act, a company and its members were bound by the provisions contained
in the articles of association. The articles regulated the internal management
of the company and defined the powers of its officers. They also established a
contract between the company and the members and the members inter se. The
contract governed the ordinary rights and obligations incidental to membership
in the company. . . .” (p. 52)
12. In view of the law declared by the Supreme
Court the articles of association of the company are in the nature of a
contract, though the exact nature of the contract is very difficult to define (See
the opinion of Lord Sterndale M.R. 1920 Ch.D. 154 at 162) between the company,
and its shareholders and the members inter se, stipulating the terms on which a
person becomes a member of the company. In other words the rights and
liabilities of the members of a company are regulated by the articles of
association. Obviously, a person on becoming the member of the company, agrees
to be bound by such a contract.
13. But in the present case, the provision for
compulsory transfer of shares of one of the members against the member’s
consent was not there originally in the articles of association; but included
subsequently by an amendment of the articles of association. The alteration of
the articles of association is permitted under section 31 of the Companies Act.
Sub-section (1) of section 31 reads as follows :
“(1) Subject to the provisions of this Act and
to the conditions contained in its memorandum, a company may, by special resolution,
alter its articles”.
14. Sub-section (2) of section 31 declares that
the alteration so made shall be as valid as if originally contained in the
articles of association subject, of course, to the provisions of the Act.
Therefore, the fact that the amended articles 16A to 16C provided for
compulsory transfer of the shares against the wishes of some of the existing
members of the company, in my view, does not make any difference insofar as
it’s legality is concerned, if the company could provide such articles at the
inception or prior to the entry of such of the members. The question is whether
such a power to expel a member of the company can be conferred by the articles
of association as originally framed ?
15. It is no more res integra Lord Warrington J.
in his concurring judgment in Sidebottom v. Kershaw 1920 Ch.D. 154 held :
“. . . a power which is virtually a power to
expel a member upon terms to get rid of a member as shareholder . . . . it is
conceded and in fact it could not be contended otherwise, that such a power
might be resorted in the articles of association as originally framed”. (p.
169)
16. In a separate but concurring judgment Lord Warrington, J. observed :
“. . . that such a provision if inserted in
the original articles would be valid follows from the decision in Phillips v.
Mfrs. Securities Ltd. 116 LT 290.”
17. Similarly, in Naresh Chandra Sanyal’s case
(supra) the Supreme Court held valid a condition of the articles of
association of the Calcutta Stock Exchange Association, which provided for the
forfeiture of the shares of one of the members of the stock exchange on the
ground that the member failed to carry out his engagement. Their Lordships
justified the existence of such a clause on the ground that the articles of
association are in the nature of a contract and the forfeiture of the shares is
in the nature of a penalty authorised under section 74 of the Contracts Act.
18. At this juncture, the decision of the Madras
High Court in Madhava Ramachandra Kamath v. Canara Banking Corpn. Ltd. [1941]
11 Comp. Cas. 78 requires an examination as it was heavily relied upon by the
learned counsel for the first respondent and also by the CLB in support of it’s
decision. It was a case where the shareholder of a banking corporation was
expelled by a special resolution of the General Body. Under the articles of association;
however, on the date of passing of such a resolution the banking company had no
power to deal with the shares of such expelled members. Subsequently, the
company altered its articles of association whereby the company could compel
the shareholder to transfer his shares at a price which was to be fixed under
the provisions of the articles of association and also the company was enabled
to authorise one of it’s directors to sign the necessary instrument of
transfer on behalf of the member who is required to compulsorily transfer the
shares. The learned single Judge of the Madras High Court held that the amended
article which purported to confer power on the directors to transfer the shares
of an expelled member was ultra vires of section 34 of the Indian Companies
Act, 1913.
19. The learned Judge held that the amended
articles of association which fell for consideration before him was inconsistent
with the requirement of section 34(3) of the Indian Companies Act, 1913, as
under section 34(3) of the Act the instrument of transfer was required to be
executed by the transferor and the transferee. Sub-section (3) of section 34
reads as follows :
“It shall not be lawful for the company to
register a transfer of share in or debentures of the company unless the proper
instrument of transfer duly stamped and executed by the transferor and the
transferee has been delivered to the company along with the scrip.”
Whereas section 108 which broadly corresponds
to section 34 of the Repealed enactment recognises that the instrument of
transfer could be executed either by or on behalf of the transferor and by or
on behalf of the transferee. Sub-section (1) of section 108 reads as follows :
“(1) A company shall not register a transfer
of shares in, or debentures of, the company, unless a proper instrument of
transfer duly stamped and executed by or on behalf of the transferor and by or
on behalf of the transferee and specifying the name, address and occupation, if
any, of the transferee, has been
delivered to the company along with the certificate relating to the shares or
debentures, or if no such certificate is in existence, along with the letter of
allotment of the shares or debentures:”
20. Therefore, the language of section 34(3) on
the basis of which the above-mentioned judgment of the Madras High Court was
rendered is different from the language of section 108. Section 108 recognises
that a transfer deed could be executed either by the transferor or on behalf of
the transferor. In fact, the Madras High Court in the above mentioned decision
recognised exceptions to the rule contained under section 34(3) of the Indian
Companies Act, 1913. The learned Judge dealt with the exceptions in the
following words :
“There are of course occasions when the
transferor does not or cannot sign, such as when a Court sale has been held. In
that event Order 21, Rule 80, of the Code of Civil Procedure provides for the
Judge or an Officer of Court directed by him signing the transfer instrument.”
21. Therefore the requirement that only the
transferor should execute the instrument of transfer is not absolute. More
particularly in view of the language of section 108, which is already noticed.
Such an execution could be on behalf of the transferor if it is authorised
either by the transferor or by law. The unamended article 13 of the articles of
association authorised the execution of the instrument of transfer by one of
the directors in the contingencies contemplated therein. The amended article
16C adopted the same procedure for the cases covered under articles 16A and
16B. Therefore, I am of the opinion that the judgment of the Madras High Court
has no application to the facts of the present case. Hence, it cannot be said
that the transfer of the shares in question is in contravention of section 108.
To that extent, the decision of the CLB must be held to be bad.
22. Coming to the question whether the decision
of the company to cancel the membership of the first respondent is a bona fide
decision or not. The principles of law in this regard is clearly stated in
Sidebottom’s case (supra) that such a compulsory transfer must be in the
interests of the company, but not for the benefit of some of the shareholders
even if they are the majority shareholders. Unfortunately, the CLB has not
examined this aspect. From the explanatory statement under section 173(2) of
the Act appended to the notice of the Extraordinary General Meeting dated
30-11-1999, which is already extracted earlier in this judgment, it appears,
that the first respondent and her husband are making complaints against the
functioning of the company to the various authorities like the income tax
authorities and banks. Those complaints are resulting in proceedings before the
authorities where the company had to defend itself. Nothing is stated that such
proceedings are resulting in detriment to the company as such. Obviously, those
who are in the management of the company felt that all this is an avoidable
nuisance.
23. Dealing with the legality of the alteration
of the articles of association conferring the power on the company to expel one
of the shareholders, the Court of Appeal in the Sidebottom’s case (supra) held
that such a power is subject to one limitation Lord Sterndale M.R. J., in his
judgment at page 162 held as follows :
“. . . The limitation is also stated by
Astbury J. in Brown v. British Abrasive Wheel Co. [1919] 1 Ch. 290, to which I
shall have to refer later on, and it is stated by Lord Wrenbury in the 9th
edition of his book on the Companies Act, at p. 25, that ‘Possibly the
limitation on the power of altering the articles may turn out to be that the
alteration must not be such as to sacrifice the interests of the minority to
those of a majority without any reasonable prospect of advantage to the company
as a whole’. . . .”.
In my view, the same test applies in deciding
whether in a given case the power was bona fide exercise or not. Applying this
test, I do not find any material on record to hold that the decision of the
first appellant to expel the first respondent shareholder, is with any
reasonable prospect of advantage to the company as a whole nor is it
established that all the activity of the first respondent and her husband in
sending up various complaints resulted in any tangible damage to the company.
In fact, by sending out the first respondent by cancelling her membership,
there is no assurance that the first respondent or her husband would be stopped
from sending the complaints against the company. In the circumstances, I am of
the opinion that the action of the appellants herein in cancelling the
membership of the first respondent will achieve no benefit or advantage to the
company as a whole; consequentially, the same must be held to be illegal.
24. For all the above mentioned reasons, I do not agree with the reasoning of the CLB in passing the order under appeal. The conclusion reached by the CLB is right and I see no reason to interfere with the same. The appeal is therefore dismissed, but in the circumstances without costs.
Delhi High Court
Companies Act
[2002]
40 SCL 835 (
HIGH COURT OF
Power
Grid Corpn. of India Ltd.
v.
Citi Bank N.A.
Vikramajit
Sen, J.
Section 108 of the Companies Act, 1956 - Transfer
of shares - Not to be registered except on production of instrument of transfer
- Though petitioner allotted bonds in favour of Canfina, but actual bond
certificates were not given - Canfina transferred these Bonds to Citi Bank -
Petitioner failed to transfer same despite lodgement of duly filled transfer
forms along with allotment letters by Citi Bank - Subsequently, Citi Bank
initiated proceedings before CLB under section 111 - During pendency of
proceedings, Citi Bank transferred its rights in Bonds to Canfina - CLB held
that petition was maintainable under section 111(4) - In instant appeal,
petitioner contended that Citi Bank had ceased to have any further interest in
proceedings before CLB and, therefore, same should be terminated - Original proceedings
before CLB had been stayed in appeal and Citi Bank had not put in any
representation - Canfina contended that even in absence of Citi Bank, Canfina
should be heard in appeal as it now represented Citi Bank in capacity of its
assignee by virtue of an agreement between these two parties - Whether having
failed to obtain leave of court, Canfina could not be heard as a necessary and
proper party in substitution of original applicant and as first respondent in
proceedings before CLB - Held, yes - Whether letters of allotment can be
equated with shares, bonds or debentures which are inherently and per se
negotiable - Held, no - Whether as such only Citi Bank was eligible to claim
registration of ‘Bonds’ in its name on strength of such letters - Held, yes -
Whether once it was found that Citi Bank had no conveyable interest, Canfina
could not assume role of its representative under section 146 or any other
provision of Code of Civil Procedure, 1908 - Held, yes - Whether, therefore,
petition pending before CLB under section 111 was to be dismissed - Held, yes
The petitioner issued bonds of the face value
of Rs. 80 crores bearing interest at the rate of 17 per cent per annum. This
was achieved through private placement in favour of the respondent No. 2, i.e.,
Canfina. Since the actual Bond Certificates were not ready on the date of
allotment, only letters of allotment were issued in favour of Canfina. Canfina
transferred these ‘Bonds’ to the respondent No. 1 (Citi Bank) of the face value
of Rs. 30 crores along with interest thereon from the date of the said
allotment. Thereafter, the allotment letters along with the transfer forms duly
filled were lodged for transfer by the Citi Bank with the petitioner. The
petitioner neither processed the allotment letters nor transferred the Bonds in
the name of Citi Bank. Citi Bank approached the CLB and initiated proceedings
under section 111. During the pendency of the proceedings, Canfina and Citi
Bank executed an agreement on 10-1-1995, whereby the latter transferred its
rights to the former. Subsequently, by its order the CLB expressed the opinion
that the petition filed by Citi Bank was maintainable under section 111(4). It
was against this order that the instant appeal was filed by the petitioner
contending that since Citi Bank had re-transferred or returned the subject
‘Bonds’ to Canfina, Citi Bank had ceased to have any further interest in the
proceedings before the CLB, which proceedings should, therefore, be terminated
by the Court. However, Canfina contended that even in the absence of Citi Bank,
Canfina should be heard in the appeal as it now represented Citi Bank in the
capacity of its assignee, by virtue of an agreement between them dated
10-1-1995.
On appeal :
Held
The scope of the appeal did not encompass the
entire dispute between the parties. It was not in controversy that the
petitioner had only issued letters of allotment and that the bond certificates
were deliberately not issued. There was some controversy on the point whether
any payment was received by the petitioner from Canfina. If none was received,
prima facie the letters of allotment would suffer from the vice of absence of
any consideration and would, therefore, not command legal efficacy. Despite the
agreement dated 10-1-1995 between Canfina and Citi Bank, Canfina did not apply
for its transposition as a co-petitioner with Citi Bank in the petition under
section 111, or in replacement/substitution of Citi Bank in the instant appeal,
despite the passage of almost three months till the Court stayed further
proceedings before the Company Law Board. In the course of arguments, Canfina
sought the leave of the Court to do so, after the passage of over six years and
eight months. Obtainment of leave of the Court to file an application either
for transposition or for impleadment in a lis is not a precondition or
prerequisite for its filing. There was no justification for granting such leave
at this stage especially since it would have the consequence of dislodging
rights which had become entrenched with the passage of time.
While keeping in perspective the fact that the
appeal pertained only to determination on the preliminary issues that had been
raised before the CLB, nonetheless, the Court had ample power to consider the
objection articulated by the petitioner. It would be a waste of precious public
time, and a needless burden on all the parties to the dispute, to first of all
recall the interim orders either fully or to a restricted extent and thereafter
refer the parties to the CLB for passing of orders which could quite easily and
conveniently be made by the Court as the appellate court. This is clearly
envisaged by Order XLI rule 33 of the Code of Civil Procedure, 1908. The
applicability of the Code of Civil Procedure to proceedings before the
In the petition before the CLB no relief had
been claimed from or directed towards Canfina. Therefore, it was only a
proforma party, and the petitioner could have taken objection to such joinder.
It had been put to Canfina that since it was at best only a proforma party, it
ought not to have been heard as of right by the CLB, and should not be allowed
audience before the Court. In reply thereto section 146 and Order XXII rule 10
of the Code of Civil Procedure had been relied upon.
As far as the latter provision was concerned,
even assuming that a valid assignment had taken place in favour of Canfina, the
latter ought to have obtained the leave of the Court to continue proceedings in
place of Citi Bank. Having failed to obtain the leave of the Court, Canfina
could not be heard as a necessary and proper party in substitution of the
original applicant and as the first respondent in these proceedings. In fact no
limitation for moving an application under Order XXII rule 10 has been
prescribed. The fact remained that even though that question had been
considered in some detail, no application had been filed by Canfina till date.
Even though proceedings before the CLB had been stayed, that factor could not
be construed as an embargo even on the filing of such an application. In any
event there was no impediment in the way of Canfina in filing such an
application in the present proceedings, but it had not done so. Contention that
Citi Bank was not barred from opposing the appeal as it already stood impleaded
as a respondent was true but to a qualified and restricted extent. However, the
fact remained that there had been no representation on behalf of Citi Bank,
leading inexorably to the conclusion that it had no subsisting interest in this
dispute, and must be held to have abandoned or ceased to retain further
interest in its claim. By virtue of Order XXIII rule 1(4), Citi Bank had
rendered itself vulnerable to imposition of costs, and was precluded from
filing a fresh action. Had the agreement dated 10-1-1995 not been made
available to the Court, it would have done no more than decide the instant
appeal in the absence of Citi Bank. The Court does not pronounce on esoteric
legal questions and was bound to take note of forensic realities. Deciding an
appeal when the main contestant had no subsisting interest would be a futile
formality.
There was yet another obstacle in the way of
CANFINA and that was whether or not an assignment in the eyes of law had taken
place in terms of the agreement dated 10-1-1995. Only letters of allotment had
been issued by the petitioner to Canfina and according to the former, Bonds
were not issued because payment had not been received from the latter. On
behalf of the petitioner it was contended that no payment had been received
from Canfina, whereas the Canfina had averred that a sum of Rs. 120 crores had
been deposited in the former’s Bank Account. But it might not be appropriate or
necessary to enter upon these controversial questions of fact. However, while
Canfina might be correct in relying on section 108 insofar as Citi Bank was
concerned, this provision would not come to the succour of Canfina as the
successor-in-title of Citi Bank. Section 108 was introduced into the statute to
check the currency of blank transfer forms. Logically, only Citi Bank (as the
transferee) was eligible to claim the registration of the ‘Bonds’ in its name
on the strength of the letters of allotment, which cannot be equated with or be
held to be synonymous to shares, bonds or debentures which are inherently and
per se negotiable. The object and intent of section 108, the compliance of
which has been held to be mandatory in Mannalal Khetan v. Kedar Nath Khetan AIR
1977 SC 536, would be frustrated if letters of allotment exchanged between two
persons would attain infinite currency and transferability. Section 108 could
not be availed of by Citi Bank, (to whom it was not addressed), in the role of
a transferor. Citi Bank had at best merely a ‘right to sue’, which could not be
transferred under section 6(c) of the Transfer of Property Act, 1882. The
protection of this section would inure only to the benefit of the person to
whom the letter of allotment is issued, otherwise it would itself attain the
attributes of shares, bonds, debentures and be freely transferable. Letters of
allotment are not negotiable instruments. Accordingly, the absence of Citi Bank
in these proceedings assumed great relevance. Ordinarily, the appellate court
should only decide the questions and issues posed before it. If the respondent
is absent, the appeal can nonetheless be disposed of. But where the lack of any
interest of the affected and contesting party to the litigation can be gathered
from any document available to the Court, and where such abandonment is
additionally manifested by discontinuance of appearance in the legal
proceedings, the Court ought not to pursue a facile approach and avoid and
procrastinate putting an end to a forensically dead dispute. Once it was found
that Citi Bank had no conveyable interest, Canfina could not assume the role of
its representative under section 146 or any other provision of the Code of
Civil Procedure.
Furthermore, the claim of ‘Citi Bank’ assumed
that despite the forfeiture Canfina enjoyed valid title over the Bonds which it
purportedly sold to Citi Bank, the transfer of which was refused by the
petitioner. What required to be cogitated upon was whether Citi Bank could have
entered into further transactions in respect of these Bonds, the title of which
was contingent on Citi Bank succeeding in its action under section 111. It must
again be underscored that the rights of Citi Bank were the second link in the
chain of transactions, i.e., between Canfina and Citi Bank when the first and
preceding link itself, i.e., between the petitioner and Canfina had been broken
and rendered as under. It was certainly debatable as to whether Canfina could
have transferred/sold Bonds to Citi Bank without having perfected its title to
them by legal action. It was the common case that no Bonds whatsoever were
issued even to Canfina, which had neither taken any action under the Act, nor
had assailed the forfeiture by the petitioner. What had made the situation worse
confounded was that Citi Bank had transferred them further, albeit
coincidentally to the very party from whom it had purportedly purchased the
Bonds, i.e., Canfina. At the highest, Citi Bank merely had a right to sue the
petitioner for the registration of Bonds purportedly purchased by it from
Canfina. The impediment in this relief was that no action had been initiated by
Canfina for enforcing its right against the petitioner in the face of the
forfeiture. The transfer from Canfina to Citi Bank and thereafter by return
route from Citi Bank to Canfina might not have been through the vehicle of
legally acceptable documents. Citi Bank had attempted to assign rights in
favour of Canfina without the leave of the Court, as was essential under Order
XXII rule 10. The only possible conclusion was that Citi Bank must be deemed to
have abandoned its claim. The Court, even in its appellate jurisdiction,
should, therefore, dismiss the initial and original action itself.
In this analysis, the instant appeal was disposed
of by dismissing the company petition 6/111/94-CLB under section 111 pending
before the CLB.
Cases referred to
Delhi Electric Supply Undertaking v. Basanti
Devi AIR 2000 SC 43, Mahant Dhangir v. Madan Mohan AIR 1988 SC 54, Mannalal
Khetan v. Kedar Nath Khetan AIR 1977 SC 536, Rikhu Dev, Chela Bawa Harjug Dass
v. Som Dass AIR 1975 SC 2159, Thermofriz Insulations (P.) Ltd. v. Vijaya Udyog
AIR 1981 Delhi 385, Ghafoor Ahmed Khan v. Bashir Ahmad Khan AIR 1983 SC123,
Smt. Pushpa Kumari v. Dewan Chand Trust AIR 1983 Delhi 91 and Baijanti Bai v.
Prago AIR 1990 MP 370.
Mukul Rohatgi, V.K. Rao and Piyush Sharma for the Petitioner. V.N.
Kaura and Ms. Paramjit Benipal for the Respondent.
1. This
order shall decide the oral submission of Mr. Mukul Rohatgi, Learned Additional
Solicitor General, to the effect that the present Appeal as well as the
original proceedings under section 111 of the Companies Act (hereinafter
referred to as ‘the Act’) should be finally disposed of by the dismissal of the
latter lis. According to Mr. Rohatgi since the applicant before the Company Law
Board Northern Region Bench, New Delhi (hereinafter referred to as ‘CLB’)
namely Citi Bank N.A. (Respondent No. 1 hereinafter Citi Bank) has
retransferred or returned the subject ‘Bonds’ to Canbank Financial Services
Ltd. (Respondent No. 2 in this Appeal having been impleaded before the CLB as
Respondent No. 2, hereinafter Canfina), Citi Bank had ceased to have any
further interest in the proceedings before the CLB, which proceedings should
therefore be terminated by this Court. The original proceedings before the CLB
have been stayed in this Appeal in terms of Orders dated 15-3-1995. Citi Bank
has not put in any representation after 12-4-1999. Mr. V.N. Kaura, Learned
Counsel for Canfina has contended that even in the absence of Citi
Bank/Respondent No. 1, Canfina should be heard in the Appeal as it now
represents Citi Bank No. 1 in the capacity of its assignee, by virtue of an
Agreement between these two parties dated 10th January, 1995. It is his further
contention that Canfina has full legal authority and standing to prosecute the
original proceedings before the CLB as the assignee of Citi Bank. An affidavit
on behalf of Citi Bank dated 5-8-1996 has been filed in these proceedings by which
a copy of the said Agreement has been placed on record. Mr. Kaura’s contention
is that the plea presented by Mr. Rohatgi should properly be addressed to the
CLB. I have also heard arguments on the point of whether Canfina should at all
be permitted to address arguments in this Appeal for the reason that Citi Bank
had initiated proceedings under section 111 of the Companies Act, in which the
former was at best only a proforma party, it should not have any claim to
audience before me, in the Appeal under section 10F of the said Act.
2. Succinctly
stated, the dispute concerns the issue of Bonds by the Appellant of the face
value of Rs. 80 crores bearing interest at the rate of 17 per cent per annum.
This was achieved through private placement in favour of Canfina made on or
about March 10, 1992. It is averred by Canfina that because the actual Bond
Certificates were not ready on the date of allotment, only Letters of Allotment
were issued in favour of Canfina. On or about 5th May 1992, Canfina transferred
these ‘Bonds’ to Citi Bank of the face value of Rs. 30 crores along with
interest thereon, from the said allotment aggregating Rs. 80 crores. All these
events took place between 1-4-1991 and 6-6-1992 and it is indeed a mystery why
a Notification was not made under the Special Courts (Trial of Offences
Relating to Transactions in Securities) Act, 1992, considering that the avowed
objectives of this statute was to cover such like transactions. However,
equally curious things have been heard to happen. On 6-7-1992, the allotment
letters along with the transfer forms duly filled were lodged for transfer by
Citi Bank with the Appellant Powergrid. The grievance of Citi Bank before the
CLB is that powergrid neither processed the allotment letter nor transferred
the Bonds in the name of Citi Bank even till September 1993, when it approached
the CLB.
3. On
10-1-1995, Canfina and Citi Bank executed an Agreement whereby the latter
transferred its rights to the former, details of which are given below.
Subsequently, by its Order dated 7-2-1995 the CLB had expressed the opinion
that the petition filed by Citi Bank was maintainable under section 111(4) of
the Act. It refrained from discussing the point whether the limit prescribed
under section 111(3) of the Act is mandatory and whether delay is condonable,
and fixed the main petition for hearing. It is against this Order that the
present Appeal has been filed. I am fully mindful of the position that the
scope of the Appeal does not encompass the entire dispute between the parties.
It is not in controversy that Powergrid had only issued Letters of Allotment
and that the Bond Certificates were deliberately not issued. There is some
controversy on the point whether any payment was received by Powergrid from
Canfina. If none was received, prima facie the Letters of Allotment would
suffer from the vice of absence of any consideration and would therefore not
command legal efficacy. It has however been submitted by Mr. Kaura that Canfina
was to invest Rs. 60 crores in the then booming share market, and this was the
reason for the floating of the ‘Bonds’. There is also an averment by Canfina
that Rs. 120 crores was paid by it against the Bonds. Meanwhile anticipating
the issuance of the Bond Certificates, Canfina sold them for the value of Rs.
30 crores to Citi Bank.
4. It was
in this sequence of events that Citi Bank invoked section 111 of the Act and
prayed for these reliefs:—
“(a) The Respondent No. 1 be ordered and directed to transfer the
bonds stated below in the name of the Petitioner:
|
Allotment |
Distinctive |
Folio |
No. of |
|
Letter No. |
No. |
No. |
Bonds |
|
NPTC/19/90-91 |
A-1000001 to |
T 0000012 |
1,00,000 |
|
|
A-1100000 |
|
|
|
NPTC/20/90-91 |
A-1100001 to |
T 0000012 |
1,00,000 |
|
|
A-1200000 |
|
|
|
NPTC/21/90-91 |
A-1200001 to |
T 0000012 |
1,00,000; |
|
|
A-1300000 |
|
|
(b) the Respondent No. 1 be ordered and directed to rectify the
register of bond holders and delete the name of the Canbank Financial Services Ltd.
and insert the name of the Citi Bank N.A. therein;
(c) the Respondent No. 1 be ordered and directed to pay to the
Petitioners interest accrued on the said bonds for the periods stated below and
further interest till the hearing and disposal of the Petition:
10-3-1992 to 1-7-1992 - Rs.
1,57,89,041.00
1-7-1992 to 1-1-1993 - Rs.
2,55,00,000.00
1-1-1993 to 1-7-1993 - Rs.
2,55,00,000.00;
(d) that the costs of this Petition and the
order to be made thereon be provided for;
(e) for such further and other reliefs as the
nature and circumstances of the case may require.
8. The
petitioners also seeks the following interim reliefs:
(a) that pending admission and hearing and final disposal of this
Petition, that the Respondent No. 1 and its Directors, Officers, servants and
agents be restrained from in any manner whatsoever disposing of, transferring
or encumbering or parting with possession of the said bonds to any person other
than the Petitioners.”
5. On
20th January, 1994, Powergrid issued a notice of Forfeiture to Canfina and
thereafter took the threatened action on 11th February, 1994. This act of
forfeiture by Powergrid has not been challenged either by Citi Bank or Canfina.
In the context of the prayers reproduced above, and the pleadings of the
parties, the following preliminary issues were framed:—
“(i) Section 111 is applicable only in case of refusal of transfer of
shares and debentures of a company. The impugned letters of allotment are neither
shares nor debentures and as such the same does not fall within the purview of
section 111.
(ii) Petition is time barred in terms of section 111(3) as appeal
against refusal has to be made within a period of 4 months from the date of
lodgement. The instant application has been filed after a period of one year
from the date of lodgement and as such it is belated and cannot also be
condoned.
(iii) The petition has become infructuous in as much as the letters of
allotment in question have been forfeited in accordance with the articles of
association of the respondent-company.
(iv) Petitioner has not given/furnished many details like contract
note, the name of the broker through whom contract was completed, no
consideration has been shown in the transfer deed etc.”
6. During
the pendency of proceedings before the Company Law Board, Canfina and Citi Bank
entered into the aforementioned Agreement dated 10-1-1995. The salient features
are that Canfina ‘with a view to continue good business relationship with Citi
Bank have approached the Citi Bank for purchase of the said PGCIL Bonds pending
the disposal of the Company Petition filed by Citi Bank (i.e., before the
C.L.B.). It had further been agreed between these two parties that “Canfina
with full knowledge of the dispute relating to the transfer of bonds have
purchased right, title and interest in the said Bonds and Citi Bank do not in
any way warrant for the title of the said PGCIL bonds”. Clause 6 of the
Agreement is of considerable importance since the action contemplated therein
has admittedly not been taken by CANFINA, and is reproduced below:
“6. It is hereby agreed that the Company
Petition filed by Citi Bank against PGCIL as described above shall be suitably
amended to enable CANFINA to pursue their remedies against PGCIL. It is further
agreed that Citi Bank shall relinquish all their right, title and interest
whatsoever in the said Bonds. It is also further agreed that CANFINA shall
pursue such legal remedies available to them and also get themselves transposed
as Co-petitioners with Citi Bank and take all responsibility to effectively
prosecute the petition. On such amendment CANFINA shall pursue such legal
remedies available to them without recourse to Citi Bank.”
7. It
will also be of advantage to reproduce paragraphs 4 and 5 of the Affidavit
filed in this Court on behalf of the Ist Respondent i.e. CITIBANK, for reasons
which will be dealt with hereinafter :
“4. I say and submit that, as more
particularly stated above, the Ist Respondent’s right, title and interest in
the said bonds has been purchased by the 2nd Respondent and the Ist Respondent
now has no right, title or interest therein. In the circumstances, I say and
submit that it is now the 2nd Respondent’s responsibility to oppose this appeal,
get themselves transposed as the Petitioners/Co-petitioners in the petition,
and take such other steps as they may be advised in connection with the said
Bonds. In this behalf, the Ist Respondent has already forwarded to the 2nd
Respondent a joint application to be filed by the 2nd Respondent before the
Company Law Board for transposing the 2nd Respondent herein as the Petitioner
in the Company Petition before the Company Law Board. However, in view of the
stay of proceedings granted by this Hon’ble Court, the 2nd Respondent has not
pursued the said joint petition.
5. I further say and submit that in light of
the assignment of the Ist Respondent’s interest in the said Bonds to the 2nd
Respondent, the present appeal may be continued against, and opposed by, the
2nd Respondent herein and this Hon’ble Court may be pleased to give such
directions and pass such orders in this behalf as this Hon’ble Court deems fit
and proper”.
8. Despite
the Agreement between CANFINA and CITIBANK CANFINA did not apply for its transposition
as a Co-petitioner with CITIBANK in the petition under section 111 of the Act,
or in replacement/substitution of CITIBANK the present appeal, despite the
passage of almost three months till this Court stayed further proceedings
before the Company Law Board by its Orders dated 7-4-1995. In the course of
arguments, Mr. Kaura sought the leave of this Court to do so now, that is after
the passage of over six years and eight months. Obtainment of leave of this
Court to file an application either for transposition or for impleadment in a
lis is not a precondition or prerequisite for its filing. I find no
justification for granting such leave at this stage especially since it will
have the consequence of dislodging rights which have become entrenched with the
passage of time.
9. The
first contention of Mr. Kaura is that the appellant must approach the CLB with
its contention that with the so-called transfer of Bonds by CITIBANK to
CANFINA, the lis pending before it no longer subsists. It cannot be overlooked
that CITIBANK has transferred all its interests in the Bonds in favour of
CANFINA and that the latter was obliged to apply for their transfer. Failure to
do so shall have fatal consequences. Two situations can emerge, either that the
initial transfer from CANFINA and CITIBANK is effaced and rendered nugatory, or
that second transfer from CITIBANK coincidentally to CANFINA validly occurred.
In the first situation, once the transaction itself is obliterated, the action
under section 111 must also automatically come to an end. In the second
situation, CANFINA ought to have applied for the transfer of the Bonds to its
name, which was essential in view of Powergrid’s forfeiture action. It has
failed to do so and it barred by principle of limitation from initiating this
process after over six years.
10. While keeping in perspective the fact that
the present appeal pertains only to a determination on the preliminary issues
that had been raised before the CLB, nonetheless, this Court has ample power to
consider the objection articulated by Mr. Mukul Rohatgi. It would be a waste of
precious public time, and a needless burden on all the parties to the dispute,
to first of all recall the interim orders dated 7-4-1995, either fully or to a
restricted extent and thereafter refer the parties to the CLB for passing of
orders which can quite easily and conveniently be made by this Court as the
Appellate Court. This is clearly envisaged by Order XLI Rule 33 of the Code of
Civil Procedure, 1908. The applicability of the Civil Procedure Code to
proceedings before the Company Court has been specifically mentioned in
sub-rule (4) of Rule 2 and Rule 6 of the Company Court Rules, 1959. Quite
recently in Delhi Electric Supply Undertaking v. Basanti Devi AIR 2000 SC 43,
the Hon’ble Supreme Court had followed the legal exposition earlier made in
Mahant Dhangir v. Madan Mohan AIR 1988 SC 54, as contained in the following
passage :
“The sweep of the power under Rule 33 is wide
enough to determine any question not only between the appellant and respondent,
but also between respondent and co-respondents. The appellate Court could pass
any decree or order which ought to have been passed in the circumstances of the
case. The appellate Court could also pass such other decree or order as the
case may require. The words “as the case may require” used in Rule 33 of Order
41 have been put in wide terms to enable the appellate Court to pass any order
or decree to meet the ends of justice. What then should be the constraint ? We
do not find many. We are not giving any liberal interpretation. The rule itself
is liberal enough.The only constraint that we could see, may be these: That the
parties before the lower Court should be there before the appellate Court. The
question raised must properly arise out of the judgment of the lower Court. If
these two requirements are there, the appellate Court could consider any
objection against any part of the judgment or decree of the lower Court. It may
be urged by any party to the appeal. It is true that the power of the appellate
Court under Rule 33 is discretionary. But it is a proper exercise of judicial
discretion to determine all questions urged in order to render complete justice
between the parties. The Court should not refuse to exercise that discretion on
mere technicalities.”
11. It will be seen from the above that in the
petition before the CLB no relief had been claimed from or directed towards
Canfina. Therefore, it was only a proforma party, and powergrid could have
taken objection to such joinder. It has been put to Mr. Kaura that since
Canfina was at best only a proforma party, it ought not to have been heard as
of right by the Company Law Board, and should not be allowed audience before
this Court. In reply thereto section 146 and Order XXII Rule 10 of the Code of
Civil Procedure have been relied upon.
12. As far as the latter provision is concerned
it must at once be noticed that, even assuming that a valid assignment has
taken place in favour of Canfina, the latter ought to have obtained the leave
of the Court to continue proceedings in place of Citi Bank. Having failed to
obtain the leave of the Court, Canfina cannot be heard as a necessary and
proper party in substitution of the original applicant and as the first
respondent in these proceedings. I am mindful of the fact that no limitation
for moving an application under Order XXII Rule 10 has been prescribed. The
fact remains that even though this question has been considered in some detail,
no application has been filed by Canfina till date. Even though proceedings
before the CLB have been stayed, this factor cannot be construed as an embargo
even of the filing of such an application. In any event there was no impediment
in the way of Canfina in filing such an application in the present proceedings,
but it has not done so. Mr. Kaura has contended that Citi Bank is not barred
from opposing the Appeal as it already stands impleaded as a Respondent. This
is true but to a qualified and restricted extent. However, the fact remains
that there has been no representation on behalf of Citi Bank, leading
inexorably to the conclusion that it has no subsisting interest in this
dispute, and must be held to have abandoned or ceased to retain further
interest in its claim. By virtue of Order XXIII Rule 1(4), Citi Bank has
rendered itself vulnerable to imposition of costs, and is precluded from filing
a fresh action. Had the above-mentioned Agreement not been made available to
this Court it would have done no more than decide the present Appeal in the
absence of Citi Bank. The Court does not pronounce on esoteric legal questions
and is bound to take note of forensic realities. Deciding an Appeal when the
main contestant has no subsisting interest would be a futile formality.
13. There is yet another obstacle in the way of
Canfina and that is whether or not an assignment in the eyes of law has taken
place in terms of the Agreement dated 10-1-1995. As has been mentioned, only
Letters of Allotment had been issued by Powergrid to Canfina and according to
the former, Bonds were not issued because payment had not been received from
the latter. On behalf of Powergrid it is contended that no payment had been
received from Canfina, whereas the Canfina has averred that a sum of Rs. 120
Crores had been deposited in the former’s Bank Account in the Janpath, New
Delhi branch of Canara Bank. But it may not be appropriate or necessary to
enter upon these controversial questions of fact. However, while Mr. Kaura may
be correct in relying on section 108 of the Companies Act insofar as Citi Bank
is concerned, this provision would not come to the succour of Canfina as the
successor-in-title of Citi Bank. Section 108 was introduced into the statute to
check the currency of blank transfer forms. Logically, only Citi Bank (as the
transferee) was eligible to claim the registration of the ‘Bonds’ in its name
on the strength of the Letters of Allotment, which cannot be equated with or be
held to be synonymous to shares, bonds or debentures which are inherently and
per se negotiable. The object and intent of section 108, the compliance of
which has been held to be mandatory in Mannalal Khetan v. Kedar Nath Khetan AIR
1977 SC 536, would be frustrated if Letters of Allotment exchanged between two
persons would attain infinite currency and transferability. In my view section
108 cannot be availed of by Citi Bank, (to whom it was not addressed), in the
role of a transferor. Citi Bank has at best merely a ‘right to sue’, which
cannot be transferred under section 6(c) of the Transfer of Property Act. The
protection of this section would inure only to the benefit of the person to
whom the Letter of Allotment is issued, otherwise it would itself attain the
attributes of shares, bonds, debentures and be freely transferable. Letters of
Allotment are not a negotiable instruments. Accordingly, the absence of Citi
Bank in these proceedings assumes great relevance. Ordinarily, the Appellate
Court should only decide the questions and issues posed before it. If the
Respondent is absent, the Appeal can nonetheless be disposed of. But where the
lack of any interest of the affected and contesting party to the litigation can
be gathered from any document available to the Court, and where such
abandonment is additionally manifested by discontinuance of appearance in the legal
proceedings, the Court ought not to pursue a facile approach and avoid and
procrastinate putting an end to a forensically dead dispute. Once it is found
that Citi Bank had no conveyable interest, Canfina cannot assume the role of
its representative under section 146 or any other provision of the CPC.
14. Furthermore, the claim of ‘Citi Bank’ assumes
that despite the forfeiture Canfina enjoyed valid title over the Bonds which it
purportedly sold to Citi Bank the transfer of which was refused by Powergrid.
What needs to be cogitated upon is whether Citi Bank could have entered into
further transactions in respect of these Bonds, title of which is contingent on
Citi Bank succeeding in its action under section 111 of the Act. It must again
be underscored that the rights of Citi Bank are the second link in the chain of
transaction i.e., between Canfina and Citi Bank when the first and preceding
link itself i.e., between Powergrid and Canfina has been broken and rendered as
under. It is certainly debatable as to whether Canfina could have
transferred/sold Bonds to Citi Bank without having perfected its title to them
by legal action. It is the common case that no Bonds whatsoever were issued
even to Canfina, which has neither taken any action under the Companies Act nor
has assailed the forfeiture by Powergrid on 11-2-1994. What has made the
situation worse confounded is that Citi Bank has transferred them further,
albeit coincidentally to the very party from whom it had purportedly purchased
the Bonds, i.e., Canfina. At the highest, Citi Bank merely had a right to sue
Powergrid for the registration of Bonds purportedly purchased by it from
Canfina. The impediment in this relief is that no action has been initiated by
Canfina for enforcing its right against Powergrid in the face of the
forfeiture. It may also be noticed that the transfer from Canfina to Citi Bank
and thereafter by return route from Citi Bank to canfina may not have been
through the vehicle of legally acceptable documents. Citi Bank has attempted to
assign rights in favour of Canfina without the leave of the Court, as is
essential under Order XXII Rule 10 of the Code of Civil Procedure. The only
possible conclusion is that Citi Bank must be deemed to have abandoned its
claim. This Court, even in its appellate jurisdiction, should therefore dismiss
the initial and original action itself.
15. Mr. Kaura has relied on Rikhu Dev, Chela Bawa
Harjug Dass v. Som Dass AIR 1975 SC 2159, Thermofriz Insulations (P.) Ltd. v.
Vijaya Udyog AIR 1981 Delhi 385, Ghafoor Ahmed Khan v. Bashir Ahmad Khan AIR
1983 SC 123, Smt. Pushpa Kumari v. Dewan Chand Trust AIR 1983 Delhi 91 and
Baijanti Bai v. Prago AIR 1990 MP 370. In all these cases, however, what has
been transferred or assigned is property which is not the subject matter of any
controversy as to its transferable nature. A mere right to sue has not been
assigned or transferred in any of these cases. None of these proceedings are,
therefore, of any relevance.
16. In retrospect, keeping in perspective the
conundrums that had to be unravelled in this judgment, it would have been a
much easier exercise to simply decide the Appeal itself. I prefer to effect a
forensic euthanasia.
17. In this analysis, the submission made by the Additional Solicitor General on behalf of Powergrid is accepted. This Appeal is disposed of by dismissing the Company Petition 6/111/94-CLB under section 111 of the Companies Act pending before the CLB. The parties shall bear their respective costs.