TaxTMI 
TaxTMI 
1997 (10) TMI 326
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....ty capital were sold by the plaintiff to defendant No. 2 a Foreign Institutional Investor (FII) in October, 1993 and the said transfer was registered by the Company in December, 1993. Defendant No. 2 (through defendant No. 8 also an FII) thereafter sold 5,89,000 shares to defendant Nos. 6 and 7 (also FIIs) between March and November, 1996 and defendant No. 2 sold 1,19,000 shares to the plaintiff in June, 1997. Claiming a right of pre-emption, the plaintiff has filed the present suit for a decree against defendant No. 2 (FII) to execute transfer forms in respect of the suit shares (i.e., 3,81,000 shares) at the price at which defendant Nos. 2 and 8 executed transfer forms in favour of defendant Nos. 6 and 7 and in the alternative the plaintiff has prayed for a decree of Rs. 5.25 crores by way of damages in lieu of specific performance against defendant No. 2. The plaintiff has taken out the present Notice of Motion for an interim injunction to restrain defendant No. 2 from alienating, encumbering, dealing with or creating any third party rights or selling 3,81,000 shares to any person and also restrain defendant No. 1 (i.e., Gujarat Gas) from registering the transfer of 3,81,000 sh....
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....3 (Page 165) to the GIIC stating that the plaintiff was desirous of disposing of upto 38,50,000 shares out of the total of 49,95,325 held by the plaintiff and, therefore, in view of the terms of the shareholders agreement, the plaintiff was offering the shares to the GIIC for the first purchase and that in the event of the GIIC declining to take up the shares, the plaintiff would offer the shares to HOEC/HDFC and its associates or to any other interested party at a negotiated price not lower than the price determined under the formula prescribed by the shareholders agreement. The plain- tiff also mentioned that in the event of shares being offered to HOEC and its associates, a fresh shareholders agreement would be drawn up be- tween the purchasers, the plaintiff and the GIIC. The GIIC did not immediately respond to the aforesaid request, and sometime in October, 1993 the plaintiff sold 5 lakhs shares to defendant No. 2 (Jardine Fleming India Pacific Trust, an FII) at the rate of Rs. 119.45. Defendant No. 2 entered into the said transaction through defendant No. 8 (Fledgeling Nominees International Ltd., another FII). The company (defendant No. 1) registered in December 1993 transf....
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....ated 9-9-1994 (page 134) to the Company (Gujarat Gas - defendant No. 1) which reads as under : "To, Gujarat Gas Co. Ltd. 2-C Embassy Apartments, Opp. Vandana School, Dr. V. Sarabhai Road, Ambawadi, Ahmedabad-390 015. Dear Sir, We have received the enclosed letter reference No. GIIC/SEC/MD/ 3636, dated August 26, 1994 from Gujarat Industrial Investment Corporation Limited. We would like to inform you that as a representative of Fledgeling Nominees International Limited in India, we are writing on their behalf to say that we have not entered into any Nominee Agreement with Mafat Lal Industries Limited. Therefore, unless you revert with a clarification on the purpose of the enclosed letter, we do not intend to reply to the same. Thanking you, Yours faithfully, For Jardine Fleming India Ltd. Sd/- Dr. Rafiq Dossani." 8. On 17-10-1994 (page 155), the plaintiff sent a letter to the GIIC stating that the circumstances under which the plaintiff had sought to encash a part of their holding in Gujarat Gas in order to meet certain pressing obligations on the plaintiff's cash flow were explained by the plaintiff to the GIIC at various meetings. There was a protracted delay in rep....
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....tanding that the plaintiff will have a right of pre-emption on those shares; the plaintiff was surprised to know that out of the said 5 lakhs shares, 1,90,000 shares were purportedly lodged for transfer by defendant No. 2 in favour of defendant No. 6. The plaintiff, therefore, protested that the purported transfer of the aforesaid shares was in breach of the undertaking given by Jardine Fleming India Pacific Trust through their representatives Khanna Securities (P.) Ltd. and in breach of the provisions of the Articles of Association. The plaintiff, thus, lodged their objection before the company (Gujarat Gas) against the transfer of shares in the name of defendant No. 6. The plaintiff also addressed a letter dated 26-11-1996 to Khanna Securities Ltd. referring to the letter dated 16-3-1994 and its contents and making a grievance about the breach of the agreement for the first right of refusal by transfer to shares by defendant No. 2 to defendant Nos. 6 and 7. Mr. Ted Pulling of Jardine Fleming Investment Management Ltd. sent his reply on 10-12- 1996 by Fax in the following terms : To: Mafatlal Industries, Mumbai P.R. Amin Fax: 9122 202 7750 From: Ted Pulling Jardine Fleming I....
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.... relief for specific performance of the agreement referred to in the letter dated 16-3-1994. As stated in para 2 above, the plaintiff also filed the present notice of motion, inter alia, to restrain defendant No. 1 (Gujarat Gas Co. Ltd.) from registering the transfer of 3,81,000 shares and also to restrain defendant No. 2 from transferring or selling the said 3,81,000 shares to any person pending the hearing and final disposal of the suit. On 5-8-1997, the City Civil Court issued notice and granted ex parte injunction in terms of the aforesaid prayers. After hearing the parties, the City Civil Court rejected the Notice of Motion and vacated the said ex parte order on the following grounds: (i )The Civil Court's jurisdiction is barred. The present civil suit would not lie in view of the judgment of the Supreme Court in the case of Canara Bank v. Nuclear Power Corpn. of India Ltd. 1995 (3) JT SC 42/ 4 SCL 42 . (ii)The plaintiffs have failed to make out a prima facie case that the suit shares are not freely transferable. Defendant No. 1 company being a public company, the Articles of Association cannot put any restric- tion on transferability of shares. Reference is also made to the....
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.... A distinction between Jardine Fleming India Pacific Trust and Jardine Fleming India Securities (P.) Ltd. cannot be made a decisive factor at the time of considering a prima facie case in the suit for the purpose of equitable relief of injunction. (ii) The plaintiff has a right to have its pre-emption right enforced in the present suit filed before the Civil Court and such right is de hors provisions of the Act and therefore, the Company Law Board (CLB) established by the Act cannot have exclusive jurisdiction to decide such a dispute about the right of pre-emption. (iii )Irrespective of the merits of the plaintiff's case on the basis of the right of pre-emption, the plaintiff was entitled to get an injunction to restrain defendant No. 1-Company-Gujarat Gas from registering the transfer of 3,81,000 shares purported to have been transferred by defendant Nos. 2 and 8 to defendant Nos. 6 and 7 on the following grounds: (a)The transfer forms lodged by defendant Nos. 2 and 8 through defendant No. 3 do not include all the material particulars as required by the provisions of section 108 of the Act. (b)The transfer forms are lodged by defendant No. 3 without any authority from defenda....
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....right of pre-emption alleged to have been executed by defendant No. 2 in favour of the plaintiff was at the time of purchase of 5 lakhs shares in October, 1993, but no contemporaneous document is pro- duced in support of the said allegation. The affidavit in reply on behalf of the defendants has categorically denied this allega- tion and it has been asserted on behalf of the defendants that no such agreement was entered into nor was any such promise or commitment given to the plaintiff. It is inconceivable that the plaintiff, which is a giant company incorporated under the Act, would, while transferring 5 lakhs shares worth more than Rs. 5 crores, rely upon any oral agreement or promise or commitment from defendant No. 2 when defendant No. 2 is also a trust and not a natural person. The plaintiff has not given the particulars of any person or individual who is alleged to have made any such promise at the time of purchase of shares by defendant No. 2 in October, 1993. (b)Dr. Rafiq Dossani of Khanna Securities (P.) Ltd. had no author- ity to give any such commitment or promise or even to convey any understanding as mentioned in the letter dated 16-3-1994. Reliance is also placed in ....
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....ring shares to any party ? Whether the balance of convenience is in favour of the plaintiffs on the one hand or defendant Nos. 2 and 8 on the other hand ? VWhether the Civil Court has jurisdiction to entertain the suit in respect of the prayers for permanent temporary injunction against defendant No. 1 regarding registration of transfer of shares ? VIWhether the plaintiff has made out a prima facie case on merits and a case for temporary injunction against registration of transfer of shares ? Issues I & V - Jurisdiction of Civil Court: 16. It will be convenient to discuss both these issued regarding jurisdiction together as certain common legal propositions will have to be considered. 17. Mr. Vakil has submitted that the Trial Court has erred in holding that the Civil Court has no jurisdiction to entertain the present suit. In support of the said submission Mr. Vakil submitted that earlier whenever the issue of jurisdiction of the Company Court under section 155 of the Act for decision of any question regarding rectification of the register of the members had arisen, a long line of decisions such as Jayashree Shantaram Vankudre v. Rajkamal Kalamandir (P.) Ltd [1960] 30 Comp. ....
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....e provisions of sections 154, 155 and 163(2) of the Act to order rectification even in interlocutory proceedings. 20. Mr. Vakil has further placed reliance on the decision of the Division Bench of Madras High Court in the case of Kalyani Sundaram ( supra) wherein the Court held that where the plaintiff is claiming pre-emptive right to purchase shares and is challenging transfer in breach of such right of pre-emption, the tightness or wrongness of the transfer cannot be question within the scope of section 155. Since the plaintiff was merely attacking the transfer of the shares on the ground that the administrator had no authority to do so, particularly after having had the benefit of administration of the estate by him, the remedy under section 155 could not be invoked for relief. 21. As regards the decision of the Supreme Court in the case of Canara Bank (supra) Mr. Vakil submitted that in that case the Supreme Court was required to decide the limited question whether the provisions of the Special Court (Trial of Offences relating to Transactions in Securities) Act, 1992 seeking to exclude the jurisdiction of the Courts to entertain matters or claims arising out of transactions ....
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..... Desai (as His Lordship then was) in the case of Gulabrai Kalidas Naik v. Laxmidas Lallubhai Patel [1978] 48 Comp. Cas. 438 had considered the previous decisions of the Bombay High Court and of the Supreme Court in the case of Public Passenger Services Ltd. ( supra) and then held that the jurisdiction under section 155 is comprehensive en- abling the Court to decide all questions necessary or expedient to decide in connection with the application for rectification. 23. Mr. Shelat has then relied on the provisions of section 111(7), read with section 111A(7) and has submitted that the CLB has power to decide the title of the securities in question before it. Paragraph 31, which is strongly pressed into service by Mr. Shelat, reads as under : "31. Now, under section 111 of the Companies Act as amended with effect from 31st May, 1991, the CLB performs the functions that were therefore performed by Courts of Civil Judicature under section 155. It is empowered to make orders directing rectification of the company register, as to damages, costs and incidental and consequential orders. It may decide any question relating to the title of any person who is a party before it to have his n....
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....rinciple: "Where there is an express bar of the jurisdiction of the Court, an examination of the scheme of the particular Act to find the adequacy or the sufficiency of the remedies provided may be relevant but is not decisive to sustain the jurisdiction of the Civil Court. Where there is no express exclusion the examination of the remedies and the scheme of the particular Act to find out the intendment becomes necessary and the result of the inquiry may be decisive. In the latter case it is necessary to see if the statute creates a special right or a liability and provides for the determination of the right or liability and further lays down that all question about the said right and liability shall be determined by the Tribunals so constituted, and whether remedies normally associated with actions in Civil Courts are prescribed by the said statute or not." (p. 78) Similarly, in the case of Premier Automobiles Ltd. v. Kamlakar Shantaram Wadke AIR 1975 SC 2238, the following principles are laid down : ". . . the principles applicable to the jurisdiction of the Civil Court in relation to an industrial dispute may be stated thus : (1)If the dispute is not an industrial dispute, n....
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.... of the Industrial Employment Standing Orders, is an Industrial Dispute, if it satisfied the requirement of section 2(k) and/or section 2A of the Industrial Disputes Act and must be adjudicated in the forums created by the Industrial Disputes Act alone. This would be so, even if the dispute raised or relief claimed is based partly upon certified standing orders and partly on general law of contract. In para 32, Their Lordships summarised the principles and principle No. 2 reads as under : "Where, however, the dispute involves recognition, observance or enforcement of any of the rights or obligation created by the Industrial Disputes Act, the only remedy is to approach the forms created by the said Act" [Emphasis supplied] 26. The thrust of the submissions of the learned counsel for the plaintiff is that the remedy under section 155 of the Companies Act regarding rectification of register of members, (which provisions are now to be found in sections 111A and 111 of the Companies Act) has been held to be one for enforcement of the common law right [vide Mr. Justice Bharucha speaking for the Bombay High Court in the case of Om Prakash Berlia (supra)] and it has already been held by....
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....omplex, intricate or otherwise, relating to the title to the shares, and further enlarges the jurisdiction of the Court set up under the Companies Act to decide all those questions which the Court consider necessary or expedient to decide in connection with the application for rectification. In other words, when an application for rectification of register of shareholders is made, it would be open to the Court while considering the main relief to decide all questions that may arise in such an application on rival contentions. To illustrate, if a petitioner asserts title to the shares and the respondent contends that the title was acquired by a forged document, forgery would be put in issue and it would be necessary to decide the issue of forgery before the main prayer for rectification of register can be granted. ****** A petition under section 155 would be maintainable against persons who are neither directors nor shareholders. If third parties are impleaded as respondents, the Court could proceed to inquire into the allegation of the petitioner. The Court's jurisdiction would not be lost merely because third parties are required to be impleaded." [Emphasis supplied] (p. 438) I....
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.... or an application made under sub-section (4) may, after hearing the parties, either dismiss the appeal or reject the application, or by order- (a)direct that the transfer or transmission shall be registered by the company and the company shall comply with such order within ten days of the receipt of the order; or (b)direct rectification of the register and also direct the company to pay damages, if any, sustained by any party aggrieved. (6)****** (7) On any application under this section, the Company Law Board- (a)may decide any question relating to the title of any person who is a party to the application to have his name entered in, or omitted from, the register ; (b )generally, may decide any question which it is necessary or expedient to decide in connection with the application for rectification." Hence, in the opinion of this Court, the aforesaid proposition propounded by this Court in the case of Gulabrai Kalidas Naik ( supra) and by the Supreme Court in the case of Canara Bank ( supra) will apply with full force to the jurisdiction of the CLB under sections 111 and 111A. 28. Mr. Vakil has, however, submitted that the remedy of approaching the CLB under sections 111....
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....tion for rectification of the register of members and that such person need not be transferor or transferee because incidentally also his rights as a shareholder are likely to be affected. The provisions of section 155 for rectification of the register are now assimilated with the provisions of sections 111 and 111A. This decision does not carry the plaintiff's case any further, because in the above decision also, the Court was a Company Court hearing the matter under section 155. 31. In view of the above discussion and in view of the principle laid down in Rajasthan S.R.T. Corpn. case (supra), even if the dispute raised or relief claimed is based partly upon a statutory provision and partly on the general Law of Contract, the forum under the statute alone will have the jurisdiction, it is clear that insofar as the plaintiff has prayed for perma- nent and temporary injunction against the registration of transfer of shares on the basis of the non-compliance with or non-observance of the requirements of the provisions of section 108, section 25 and other relevant provisions of the Act, it must be held that for resolving this dispute, the only remedy is to approach the forum created ....
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....n which it is necessary or expedient to decide, the CLB has exclusive jurisdiction but the observation "it (CLB) has exclusive jurisdiction" is required to be confined to exclusivity amongst all the forums created by or under the Act and the observation does not have the effect of ousting the jurisdiction of the Civil Court which it already had for deciding disputes for adjudication of rights under the common law. This conclusion is fortified by the recommendation of Sachar Committee itself which is quoted in para 14 in Canara Bank's case (supra) as under: "Under the existing law, there are two remedies open to an aggrieved person to file an appeal under section 111, or to apply to the Court, for rectification of the share register under section 155. We think that these two remedies should now be assimilated and provision be made (at one place) for a person aggrieved (including any person aggrieved by a refusal of the Board of Directors to register a transfer or transmission of shares) to apply to the Company Law Board - as proposed to be constituted - for rectification of the share register on any of the grounds mentioned in sub-clause (a ) or ( b) of sub-section (1) of the prese....
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.... letter dated 16-3-1994 of Khanna Securities Ltd. written on behalf of Jardine Fleming India Secu- rities (P.) Ltd., which is quoted in para 6 above. It is, however, required to be noted that even according to the plaintiff, the aforesaid letter does not constitute the suit agreement for pre-emption, but it is the record, or reaffirmation, of an pre-existing agreement which was entered into between the plaintiff and defendant No. 8 at the time of transfer of 5 lakhs shares in October, 1993. 37. The stand of the Jardine Fleming Group through Mr. Ted Pulling (letter dated 10-12-1994) is that they were ignorant of the such communication and Dr. Rafiq Dossani was never employed by the Fund Management Division and, therefore, without any authority, he had written the letter dated 16-3-1994 and Mr. Ted Pulling was not appraised of this agreement. This stand was also reiterated at the hearing. However, in the pleadings on behalf of the defendants, defendant No. 2 has not taken any categorical stand to the effect that Dr. Rafiq Dossani had written such letter without any authority or that Dr. Rafiq Dossani had tried to help the plaintiff without any knowledge or consent of defendant No. 2....
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....ment and to take its decision which process took about 5 months' time. In the meantime, the plaintiff was in a hurry to generate some funds and, therefore, it sold off 5 lakhs shares and generated almost Rs. 6 crores by selling the shares to defendant No. 2 in the open market at Rs. 119.45 when the share price quoted at the Bombay Stock Exchange was Rs. 117.50 approximately. In all probability, at that time the plaintiff had not obtained any agreement or commitment from defendant No. 2 regarding the right of pre-emption and defendant No. 2 being an FII playing in the secondary market was not likely to give any such promise or enter into any such agreement. Admittedly, there is no such written agreement or undertak- ing either from defendant No. 2 or from anyone else in October, 1993 or even till December, 1993 when 5 lakhs shares sold by the plaintiff to defendant No. 2 were registered, but the plaintiff then found itself in a very embarrassing position when it received conditional approval from GIIC through their letter dated 7-3-1994; one of the conditions being that the purchaser of shares must also agree to the right of pre-emption being conferred on the GIIC. Having been place....
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....other than that stated in the Articles." 41A. In support of the aforesaid proposition of law, the Supreme Court relied on its decision in the case of Shanti Prasad Jain v. Kalinga Tubes Ltd. AIR 1965 SC 1535, certain English decisions and also authorities on Company Law like Palmer and Pennington. In Chapter 16 of the Gore-Brown on Companies (43rd edn.), it is stated that subject to certain limited restrictions imposed by law, a shareholder has prima facie the right to transfer his shares when and to whom he pleases. This freedom to transfer may, however, be significantly curtailed by provisions in the articles. In determining the extent of any restriction on transfer contained in the articles, a strict construction is adopted. The restriction must be set our expressly or must arise by necessary implication and any ambi- guous provision is construed in favour of the shareholder wishing to transfer. In Palmer's Company Law 24th edn. dealing with the 'transfer of shares' it is stated at page 608-9 that it is well settled that unless the articles otherwise provide the shareholder has a free right to transfer to whom he will. It is not necessary to seek in the articles for a power to....
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.... it is likely to have a serious fall out. The question may arise in the following illustrative cases : (i )The promoters of a private or a public limited company bor- rowing loans from banks and/or financial institutions have to pledge their shares with the lending institutions/banks with an agreement not to transfer the shares without prior written consent of the lending institutions/banks. Will the banks and financial institutions be reduced to a state of helplessness if such agreements are not incorporated into Articles of Associ- ation of the company ? (ii )A shareholder settles his shares on trust for the benefit of certain minor beneficiaries with a stipulation that the shares shall not be sold before the beneficiaries attain the age of 21 years. The shares may be in big companies like Reliance Industries Ltd. or TISCO. Will the restriction in the trust deed not bind the trustees merely because the restrictions are not incorporated in the Articles of Association? Would it ever be possible for such settlor to get such restrictions incorporated in the Articles of Association of big companies having millions of shareholders ? (5)Free transferability of shares does not convert....
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....t obviously, therefore, imposes additional restrictions on the member's right to transfer his shares which are contrary to the provisions of Art. 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 4 to 6 invalid as it is in breach of the agreement, is erroneous in law." 45. As far as the other arguments of Mr. Vakil are concerned, it is not open to this Court to ignore the law laid down by the Supreme Court in the case of V.B. Rangaraj ( supra) and Gujarat Bottling Co. Ltd case (supra) on any of the grounds urged by Mr. Vakil. Vide Ballabhdas Mathuradas Lakhani v. Municipal Committee AIR 1970 SC 1002. As per the settled legal position, only a Court of coordinate jurisdiction can consider whether a precedent in per incuriam. It must, therefore, be held that one defendant No. 8 and defendant No. 2 became shareholders upon registration of the transfer of shares in their favour in December, 1993, they were free to sell the shares to any party and the alleged agreement for pre-exemption, even if proved in favour of th....
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....her submitted that the plaintiff is basically interested in money as is clear from its various letters and the plaintiff has also prayed for the alternative relief of damages. Damages would be adequate remedy in case the plaintiff ultimately succeeds and, therefore, also the Court should not consider the plaintiff's prayer for interim injunction. There is consider- ation force in the submission of behalf of the contesting defendants. 47. It is required to be noted that the present shareholding of the plaintiff in defendant No. 1 company is about 5 million shares out of total 12.82 million equity shares which works out to about 39%. The shares which are subject matter of the present suit being 3,81,000 shares constitute only 3.87% of the total shareholding which the plaintiff is presently holding in defendant No. 1 company, and therefore, also damages would be an adequate remedy and there is no ground for giving specific performance of the alleged contract, even if the plaintiff were to finally succeed at the conclusion of the suit. Issue VI: 48. In view of the aforesaid discussion, it is not necessary to consider Mr. Vakil's submissions on merits insofar as the prayer for injunc....