1991 (11) TMI 195 - SC - Companies Law

Article 13 allows a living shareholder to transfer shares to existing members freely and to new members with majority approval

VB. Rangaraj Versus VB. Gopalakrishnan

SC held that Article 13 permitted a living member to transfer shares to any existing member without majority consent and to a new member with majority ... Memorandum and articles of association - Articles of association - Allotment of Shares - Binding Nature of the Agreement on the Company and Shareholders - whether the shareholders can among themselves enter into an agreement which is contrary to- or inconsistent with the articles of association of the company. - HELD THAT:- It is not disputed before us that the only article of the articles of association of the company which places a restriction on the transfer of shares is article 13. The restriction states that in the latter event the shares of the deceased member shall be first distributed among the existing members equally and if they are to be transferred to any new member, it would be done so with the consent of the majority of the existing members. It may be noticed from this restriction, that firstly there is no limitation on the transfer of his shares by a living member either to the existing member or to a new member. The only condition is that when the transfer is made to a new member, it will have to be approved by the majority of the members. The transfer may be to any existing member whether he belongs to one or the other branch of the family and in such case there is no need for consent of the majority of the members. The article in fact envisages the distribution of the shareholding of the deceased member (and not of the living member) equally among the members of both branches of the family and not of any one of the branches only. Even the shares of the deceased member can be transferred to any new member when his heirs/ nominees are net willing to become members. However, this can be done only with the consent of the majority of the members. Hence, the private agreement which is relied upon by the plaintiffs whereunder there is a restriction on a living member to transfer his shareholding only to the branch of family to which he belongs in terms imposes two restrictions which are not stipulated in the article. Firstly, it imposes a restriction on a living member to transfer the shares only to the existing members and secondly the transfer has to be only to a member belonging to the same branch of family. The agreement obviously, therefore, imposes additional restrictions on the member's right to transfer his shares which are contrary to the provisions of article 13. They are, therefore, not binding either on the shareholders or on the company. In view of this legal position, the finding recorded by the courts below that the sale by the first defendant of his shares to defendants Nos. 4 to 6 is invalid as it is in breach of the agreement, is erroneous in law. Thus, it is unnecessary to go into the question whether the High Court was justified in directing the transfer of shares by defendants Nos. 4 to 6 to the plaintiffs even if its finding that the sale was invalid was correct. Appeals are allowed. Issues Involved1. Validity of the oral agreement between shareholders.2. Binding nature of the agreement on the company and shareholders.3. Legality of the sale of shares by the first defendant to defendants Nos. 4 to 6.4. Authority of the High Court to direct transfer of shares.5. Applicability of the Articles of Association and relevant statutory provisions.Issue-Wise Detailed Analysis1. Validity of the Oral Agreement Between ShareholdersThe primary issue was whether an oral agreement between shareholders, which was not incorporated into the Articles of Association, could impose restrictions on the transfer of shares. The plaintiffs alleged that in 1951, there was an oral agreement between Baluswamy Naidu and Guruviah Naidu that each branch of the family would hold an equal number of shares and that any member wishing to sell shares would first offer them to members of his branch. Despite the defendants disputing the existence of such an agreement, the courts below found against the defendants. However, it was undisputed that the Articles of Association were not amended to reflect this agreement.2. Binding Nature of the Agreement on the Company and ShareholdersThe court examined whether the oral agreement could be binding on the company and its shareholders. The legal position, as clarified by the court, is that the Articles of Association are the regulations binding the company and its shareholders. According to Section 36 of the Companies Act, when the memorandum and articles are registered, they bind the company and the members. Therefore, any restriction on the transfer of shares must be specified in the Articles of Association to be enforceable.3. Legality of the Sale of Shares by the First Defendant to Defendants Nos. 4 to 6The court held that shares are movable property and their transfer is regulated by the Articles of Association. The only restriction on the transfer of shares is as laid down in the Articles. Since the oral agreement was not incorporated into the Articles, it could not impose additional restrictions on the transfer of shares. Therefore, the sale of shares by the first defendant to defendants Nos. 4 to 6 was not invalid.4. Authority of the High Court to Direct Transfer of SharesThe High Court had directed the substitution of the plaintiffs as shareholders in place of defendants Nos. 4 to 6, based on its finding that the sale was invalid. However, the Supreme Court found that since the sale was not invalid under the Articles of Association, the High Court's direction was not justified. The High Court could only have declared the sale invalid, not directed the transfer of shares to the plaintiffs.5. Applicability of the Articles of Association and Relevant Statutory ProvisionsThe Articles of Association of the third defendant-company, specifically Article 13, were examined. Article 13 allowed for the transfer of shares with the consent of the majority of members and did not impose the restrictions claimed by the plaintiffs. The court referred to several authorities and legal texts, including Shanti Prasad v. Kalinga Tubes Ltd., which reinforced the principle that any restriction on the transfer of shares must be expressly stated in the Articles of Association.ConclusionThe appeals were allowed, the decree of the High Court was set aside, and the plaintiffs' suit was dismissed with costs. The court concluded that the oral agreement imposing additional restrictions on the transfer of shares was not binding on the shareholders or the company, as it was not incorporated into the Articles of Association.