2020 (10) TMI 641 - Tri - Companies Law

Tribunal rules against Company's unilateral share sale, upholds Petitioner's rights

The Tribunal found that the Respondent Company could not unilaterally sell off the shares of a shareholder to recover dues by exercising paramount lien. ... Rectification of the Register of Members of the Respondent Company - Restraint on Respondent Company from holding the Annual General Meeting or Extraordinary General meeting - Whether the Company by exercising paramount lien can sell off the shares of a shareholder for recovering the dues? - HELD THAT:- The Respondent Company in the instant petition will fall under the category of 'unpaid seller' who can exercise the above rights only. Nothing more. It is settled law as decided by the Hon'ble Supreme Court of India in its judgement in TRIVENI SHANKAR SAXENA VERSUS STATE OF U.P. AND OTHERS [1991 (12) TMI 285 - SUPREME COURT] a lien is only a right to retain which is rightfully and continuously in possession belonging to another until the claims are satisfied. It can be acquired either by contract or by operation of law. It is the right of retention of goods - in the absence of delineated process to exercise paramount lien, the Respondent Company can exercise lien to the extent of retention of goods; in this case shares which can be extendable payable to the shareholder - thus, they have no right to unilaterally sell the shares which are in possession of the shareholder, without the consent. Whether the action of 1st Respondent Company is backed up by any contractual agreement to recover the 'rental dues' by auctioning the shares? - HELD THAT:- We have not come across any agreement showing that shops under occupation of the Petitioner is given on lease to them by the Respondent Company. As averred by the counsel for the Respondent company, company was collecting service charges from the shops as no agreement was in place. In the absence of a written agreement a documentary evidence to support their action, the very action of the Respondent's company was without any basis. Any of the unilateral action by one party, will not bind the others and will be set aside - During the arguments the bench asked to the PCS representing the company whether the company has taken any steps to get the shop vacated by the occupants for their rental arrears. The respondents submitted that they have not taken any action in this regard. Whether due process is followed by the Company in auctioning and allotting the shares to a 3rd party? - HELD THAT:- The Articles of Association of the company is silent about the process to be followed to ensure paramount lien. However, in the Respondent Company, the lien was exercised for recovery of rental dues by auction the shares. Here the Respondents exercised right to lien to recover the arrears of rent from the shareholder who has not agreed to execute rental/lease agreement - In the instant petition, the Respondent auctioned the shares without the consent of shareholders and without original shre certificate and transfer form in their possession. The earlier action appears to the illegal and not as per the Companies Act 2013. As such the answer to the third point is also negative. Accordingly, the company has no right to auction and allot the shares to the third parties ignoring the right of fully paid up shareholders. The rental dues claimed by the respondent company is not supported by rental/lease agreement which is agreed by shareholder - thus, the entire acts of the company to auction the shares appears to be malfide and with ulterior motives. The Petitioner is declared as the legitimate equity share holder under Folio No. 53 - it is hereby directed that the rectification of the Register of Members of the Respondent Company by re-entering the total number of 100 equity shares belonging to the Petitioner in the share register of the company and further ordering to restore the total shareholding of the Petitioner as it is existed prior to 08.02.2019 forthwith - Respondent Company is restrained from conducting tender for sale of 100 shares from allotting or effecting transfer of any shares belonging to the petitioner without his express consent to any members or non-members till rectification of share register - Respondent Company is directed to file the Register of Members after carrying the rectifications as per this order, with Registrar of Companies within a period of one month - respondent company is directed to pay ₹ 25,000/- to the petitioner towards the costs and damages sustained by the petitioner in this regard. Issues Involved:1. Whether the Company by exercising paramount lien can sell off the shares of a shareholder for recovering the duesRs.2. Whether the action of the 1st Respondent Company is backed up by any contractual agreement to recover the 'rental dues' by auctioning the sharesRs.3. Whether due process is followed by the Company in auctioning and allotting the shares to a third partyRs.Issue-wise Detailed Analysis:1. Paramount Lien and Sale of Shares:The Tribunal examined whether the 1st Respondent Company could sell the shares of a shareholder to recover dues by exercising paramount lien. The Articles of Association of the 1st Respondent Company and the Model Articles of Association under Schedule I Table F of the Companies Act, 2013 were reviewed. Clause 6(1) of the Articles of Association indicates that Regulation 9 of Table A of the 1956 Act is not applicable, meaning Clause 9 of Table F is also not applicable. The Company’s Articles of Association allow for paramount lien for recovery of dues, but do not prescribe the process for such recovery. The Tribunal found that the Company could only exercise lien to the extent of retaining shares, not selling them without the shareholder's consent. This interpretation aligns with the Sale of Goods Act, 1930, which defines shares as 'movable property' and grants the unpaid seller rights such as lien and retention but not sale without consent. The Tribunal concluded that the Respondent Company had no right to unilaterally sell the shares.2. Contractual Agreement for Recovery of Rental Dues:The Tribunal found no evidence of any agreement showing that the shops under the Petitioner’s occupation were leased to them by the Respondent Company. The Respondent Company was collecting service charges, not rent, and no lease agreement was in place. Without a written agreement or documentary evidence to support their actions, the Respondent Company’s unilateral actions were deemed baseless. The Tribunal also noted that the claims regarding benami holdings and non-compliance with the Income Tax Act were unsupported by any valid notice or credible report. The Respondent Company had not taken steps to regularize the position of the shops or to vacate them for rental arrears.3. Due Process in Auctioning and Allotting Shares:The Articles of Association of the Company did not outline the process for ensuring paramount lien. The Respondent Company exercised lien to recover rental dues by auctioning the shares without the shareholder's consent and without possessing the original share certificate and transfer form. This action was found to be illegal and not in accordance with the Companies Act, 2013. The Tribunal emphasized the difference between a lien and a pledge, noting that a lien is merely a right of retention without the power of sale or disposition of goods. The Respondent Company’s actions were deemed to have been conducted with malafide intent and ulterior motives.Conclusion and Order:The Tribunal concluded that the Petitioner had a strong case and passed the following orders:1. Declared the Petitioner as the legitimate equity shareholder under Folio No. 53.2. Directed the rectification of the Register of Members of the Respondent Company by re-entering the Petitioner’s 100 equity shares and restoring the shareholding as it existed prior to 08.02.2019.3. Restrained the Respondent Company from conducting a tender for the sale of the Petitioner’s 100 shares or effecting any transfer without the Petitioner’s express consent.4. Directed the Respondent Company to file the rectified Register of Members with the Registrar of Companies within one month.5. Directed the Respondent Company to pay Rs. 25,000/- to the Petitioner towards costs and damages.