2017 (8) TMI 426 - HC - Companies Law

Supreme Court clarifies membership rules under Companies Act

Darius Rutton Kavasmaneck, Mumbai Versus Gharda Chemicals Limited, Keki Hormusji Gharda, Aban Keki Gharda, A.K. Luke, Almitra H. Patel, And D.T. Desai

The Supreme Court remanded the case to determine if the transfer of shares resulted in the total members of the respondent not exceeding 50, finding that ... Membership of the private company exceeded 50 or not - joint share holdings of the members - exclusion of employee quota - Deemed public company - transfer of five shares of the appellant (singly) to the appellant jointly with his children and wife - according to the respondents resulted in the membership of the 1st respondent company exceeding 50 thereby rendering the 1st respondent a public company. Held that:- In view of the condition imposed in Section 3(1)(iii)(b)(ii), even if the employee share holders who continued to be the members after their employment ceased are also required to be excluded categorically while computing the number of members fifty as restricted under Section 3(1)(iii)(b). In my view, any such transfer made by such employee share holder in favour of his wife or children would not make his wife or children as a member to be included within the number of fifty members and such member, if any, would be continued to be excluded for the purpose of computation of fifty members under Section 3(1)(iii)(b) of the Companies Act, 1956. The submission of the learned senior counsel for the respondent no.1 that such employee quota share does not remain as employee quota or that there is no bar for transfer of such shares by the employees under Article 59 of the Articles of Association, cannot be accepted. (i) The number of members of the respondent no.1 has not exceeded 50 by virtue of transfer of shares by the appellant (singly) to the appellant jointly with his children and wife. (ii) Interim protection granted by the Supreme Court in favour of the appellant to continue for a period of twelve weeks. Issues Involved:1. Whether the transfer of five shares from the appellant (singly) to the appellant jointly with his children and wife resulted in the total members of the respondent no.1 exceeding 50.2. The effect of such transfer on Article 57 of the Articles of Association of the respondent no.1.Detailed Analysis:Issue 1: Membership Exceeding 50The Supreme Court remanded the case to determine if the transfer of five shares resulted in the total members of respondent no.1 exceeding 50, thereby rendering it a public company. The appellant argued that the employee shareholders and joint shareholders should be excluded in counting the 50 members under Section 3(1)(iii) of the Companies Act, 1956. The appellant claimed that the transfer of shares to himself jointly with his family members did not exceed the membership limit as the appellant remained the first named member.The court considered various statutory provisions and Articles of Association, including Articles 3, 15, 20, 52, 57, 59(a) and (b), 101, and 193. Article 3 restricts the number of members to 50, excluding employees and former employees who remain members. Article 59(b) stipulates that employee shares must be transferred to other members upon cessation of employment.The court found that the number of members did not exceed 50, as the joint shareholders (appellant and his family) should be treated as a single member. Additionally, employee shares and their transferees (family members) should be excluded from the count. The court held that the joint shareholding of the appellant and his family members did not result in multiple memberships, thus the total number of members remained below 50.Issue 2: Effect on Article 57The court noted that Article 57, which restricts the transfer of shares, was argued to be invalid after the amendment to the Companies Act in 2000. However, the Supreme Court's judgment indicated that the failure to amend the Articles of Association did not affect the operation of Article 57. The court did not delve into the issue of whether Article 57 was in force at the time of the transfer or its subsequent deletion, focusing solely on the membership count.Conclusion:1. The transfer of shares by the appellant to himself jointly with his family members did not result in the total members of respondent no.1 exceeding 50.2. The interim protection granted by the Supreme Court in favor of the appellant is to continue for twelve weeks.The court's decision was based on the interpretation of Section 3(1)(iii) of the Companies Act, 1956, and the relevant Articles of Association, concluding that the membership did not exceed the statutory limit.