2006 (6) TMI 523 - Board - Companies Law

Invalid Share Transmission Due to Malafide Intentions: Board Decision Overturned, Register Rectified

Smt. Laxmi Devi Newar (Since Versus East India Investment Company

The Court found that the transmission of shares without probate to the 2nd respondent was invalid due to malafide intentions and violations of the ... - Issues Involved:1. Rectification of the Register of Members.2. Validity of the transmission of shares without probate.3. Locus standi of the petitioners.4. Allegations of malafide intention and procedural irregularities.5. Legal implications of the Articles of Association and the Indian Succession Act.6. Conflict of decisions due to parallel proceedings in Calcutta High Court.Detailed Analysis:1. Rectification of the Register of Members:The petitioners sought rectification of the Register of Members of East India (P) Limited by removing the name of RSL, the 2nd respondent, in respect of 33715 shares previously held by the deceased PDB. The petitioners argued that the transmission was done without probate and violated the Articles of Association. The Board approved the transmission based on legal opinions and past precedence, which the petitioners contended were fallacious and relied on incorrectly.2. Validity of the Transmission of Shares Without Probate:The petitioners argued that per Article 47 of the Articles of Association, transmission of shares without probate was not permissible. They contended that the discretionary powers vested in the Board were exercised on wrong principles and without following due process. The Board's reliance on past precedence and legal opinions was questioned, and it was argued that the decision to dispense with probate was taken without proper authorization and in violation of the Articles.3. Locus Standi of the Petitioners:The respondents questioned the locus standi of the petitioners, arguing that they were neither members nor aggrieved persons with a direct interest in the shares. However, the petitioners, being legal heirs of PDB, were recognized by the Calcutta High Court as heirs on intestacy. The judgment cited the Supreme Court's decision in Claude Lila Parulekar v. Sakal Papers (P) Ltd., which allowed a person with a contingent right to maintain an application for rectification.4. Allegations of Malafide Intention and Procedural Irregularities:The petitioners alleged that the transmission was approved with malafide intentions to benefit RSL. They pointed out procedural irregularities, such as the absence of a Board meeting to decide on the transmission, the lack of proper notice, and the timing of the Board meeting on the day of PDB's Shradh ceremony. The judgment noted that the directors acted in concert to get the shares transmitted without probate, indicating malafide intentions and an ulterior motive.5. Legal Implications of the Articles of Association and the Indian Succession Act:The judgment emphasized that the Articles of Association are a contract between the members and the company and must be construed accordingly. The discretionary powers vested in the Board under Article 47 were to be exercised cautiously and in the interest of the company. The judgment also noted that while Section 211 of the Indian Succession Act vests the property of the deceased in the executor, the title becomes certain only upon obtaining probate.6. Conflict of Decisions Due to Parallel Proceedings in Calcutta High Court:The respondents argued that the matter should be deferred to avoid conflict with similar suits pending in the Calcutta High Court. However, the judgment noted that the suits filed in the High Court sought different reliefs and did not preclude the Company Law Board from deciding on the rectification of the register. The High Court's order directing the maintenance of status quo did not place any fetters on the CLB's authority to order rectification.Conclusion:The judgment concluded that the transmission of shares to RSL without probate was done on wrong principles, with malafide intentions, and in violation of the Articles of Association. The Board's decision was set aside, and the Register of Members was ordered to be rectified by restoring the name of PDB. The petitioners were recognized as having locus standi to file the petition, and the judgment emphasized the importance of adhering to the Articles of Association and exercising discretionary powers judiciously.