TaxTMI 
TaxTMI 
2005 (3) TMI 468
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....ted by Shanta and the appellant under section 155 (as it stood in 1986) of the Companies Act, 1956 (referred to hereafter as 'the Act') in the Bombay High Court. The appellant was brought on record as Shanta's only legal heir and representative. As Shanta was alive during the proceedings before the High Court, to avoid unnecessary verbiage, the appellant and Shanta are referred to hereafter as 'the appellants'. One of the matters in dispute in this appeal relates to the transfer of 3417 shares in the company belonging to the estate of late Dr. Parulekar by three of the four executors of the will of Dr. Parulekar. The executors named in the will were Shanta, the respondent No. 2, the respondent No. 3 and the respondent No. 4. There is also a challenge to the transfer of 93 shares by the respondent Nos. 3 and 4 in the company. The basis of the claim of the appellant and Shanta with regard to the 3417 and 93 shares was the failure to allow the appellants to exercise their undisputed right of preemption in respect of the shares. The second branch of the appellants' grievance pertains to the issue and allotment of 17,666 shares of the company. The beneficiary of these transfers/al....
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....es by way of compensation of Rs. 3 crore or 4 crore? The suits are pending. Also between the decision of the Single Judge and the filing of the appeal by the appellants, the company became a Public Limited Company by virtue of section 43A of the Act. At the time of admission of the appeal an interim order had been passed by the Division Bench on 21st December, 1989 directing that pending disposal of the appeal, the appellants' right of preemption was not to be disturbed and the company was directed not to issue or invite any fresh capital. The appeal filed by the appellants against the judgment and order of the learned Single Judge as also cross appeals filed by the respondents were heard and disposed of by a common judgment. The Division Bench dismissed the appellants' appeal and allowed the cross appeals filed by the respondents holding inter alia that the violation of section 108 was a mere irregularity which was curable that the sale of 3417 shares had been validly made to the Pawar Group and that although there was some irregularity in issuing the 17,666 shares, the irregularity had been cured by the subsequent ratification of the decision. At the instance of the appel- ....
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....jurisdiction under section 155 was not exclusive and the Company Court had concurrent jurisdiction with Civil Courts, this Court should not relegate the appellants to the alternative remedy of a Civil Suit having regard to the facts of this case, especially, the pendency of the matter before the different courts from 1986. The Trial Court had rejected the preliminary objection and held that it was open to the parties to choose any one of the remedies available to such party and that the remedy under section 155 of the Companies Act was equally 'efficacious, definitely more speedy and certainly appropriate'. The Division Bench did not go into the issue having held in favour of the respondents on the merits. Section 155 of the Act (as it stood in 1986) provided inter alia as follows:- "Power of Court to rectify register of members.-(1) If- (a)the name of any person- (i)is without sufficient cause, entered in the register of members of a company, or (ii)after having been entered in the register, is without sufficient cause, omitted therefrom; or (b)default is made, or unnecessary delay takes place in entering on the register the fact of any person having become, o....
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....y of a separate suit or otherwise. The appellants in paragraph 26 of the Company Petition correctly reserved their right to file appropriate action for transfer of the 3,417 shares to themselves. The relevant prayers in the appellants Company Petition 476/86 were as follows : "(a)That this Hon'ble Court be pleased to order the rectification of the Register of Members of the 1st respondent Company and order that the names of Respondent Nos. 5, 6, 8, 11, 12, 13 and 14 be removed from the Register of Members of the 1st Respondent Company in respect of 3,417 shares belonging to the estate of Dr. N.B. Parulekar and 93 shares belonging to the 2nd Respondent; (b)That this Hon'ble Court be pleased to order rectification of the Register of Members of the 1st Respondent Company and do order that the names of Respondent Nos. 11, 12, 13, 15 and 16 be removed from the Register of Members of the 1st Respondent Company in respect of 17,666 shares; (c)That Respondent Nos. 5, 6, 8, 11, 12, 13 and 14 be ordered and directed by a mandatory order and injunction of this Hon'ble Court to deliver up to the 1st respondent the share certificates in respect of the said 3417 shares and 93 shares ....
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....s still no order of any Court which directed the respondents to deliver these shares to the petitioners". If there is any issue in the suit which was required to be and has been determined in the Company Petition, the effect of that determination would no doubt be the subject-matter of consideration by the Civil Judge, Pune, before whom the suits are pending. But the possibility of overlapping of such issues does not preclude the filing of the suits by the appellants. The appellants advisedly did not pray for the transfer and registration of the disputed shares in their favour in the proceedings under section 155. They could not have done so. That the Court exercising jurisdiction under section 155 of the Companies Act was competent to entertain the applications filed by the appellants cannot be disputed. The only question is whether the discretion to do so was properly exercised. Despite the respondents' submissions to the contrary, we do not consider this case as an appropriate one to decide whether this Court's decision in Ammonia Supplies Corpn. (P.) Ltd.'s case (supra) was correct insofar as it has held that the jurisdiction to grant relief provided under section 155 was....
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....ce by the transferee/transferees. I.3 The other relevant articles are Articles 58 to 64. All these articles are under a group entitled "Transfer and transmission of shares". Article 57A is the first of the group. The remaining articles read as under:- "58. Subject to clause 57A no shares shall be transferred so long as any member or any person selected by the Directors as one to whom it is desirable in the interest of the Company to admit to membership, is willing to purchase the same at the fair value as mentioned herein below. 59. Except where the transfer is made pursuant to Article 58 hereof, the person proposing to transfer any share shall give notice in writing to the Company that he desires to transfer the same. Such notice shall constitute the Directors his agents for the sale of the share to any member or persons selected as aforesaid, at a fair value to be agreed upon between the transferor and the purchaser and in default of such agreement to be fixed by the Auditors of the Company. The notice may include several shares and in such case shall operate as if it were a separate notice in respect of each share. The notice shall not be revocable except with the sanct....
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.... company to admit to its membership." I.4.1 The Articles give the hierarchy of the persons entitled to purchase shares upon transfer. The first right is given to the preemptors under Article 57A. Next in the hierarchy is any member who is willing to purchase the shares at a fair value. This follows from a reading of Article 58 with Article 64. The third category is of any person or persons selected by the Directors as being desirable in the interest of the company to admit to membership. The last category is the person to whom the transferor may choose to sell the shares. As long as there is any person in a higher category, there is no question of sale or purchase by a person in a lower category. Thus for example the right of a member or a person in the 2nd category to purchase shares can arise only in the event there is a default or refusal on the part of the preemptor and so on. A person may fall within any one or more of these four categories and would, by virtue of these articles have distinct and separate rights to purchase the shares in each of the four categories. So even if a preemptor or a nominee of a preemptor does not exercise his/her right under Article 57A to purch....
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....ure of Article 58. I.4.3 Assuming there is a willing purchaser under Article 58, there is no time limit fixed either for the parties to arrive at a negotiated price or for the Auditor to fix a fair value. But Article 63 indicates that the entire transaction envisaged by Articles 59, 60, 61 and 62 would have to be completed within a period of 60 days after Article 57A failed to operate. I.4.4 Section 36 of the Companies Act, 1956 makes the Memorandum and Articles of Company, when registered, binding not only on the company but also the members inter se to the same extent as if they had been signed by the company and by each member and covenanted to by the company and each shareholder to observe all the provisions of the Memorandum and of the Articles. The Articles of Association constitute a contract not merely between the shareholders and the company but between the individual shareholders also. The Articles are a source of powers of the Directors who can as a result exercise only those powers conferred by the Articles in accordance therewith. Any action referable to the Articles and contrary thereto would be ultra vires. I.4.5 Thus in Hunter v. Hunter [1936] AC 222, the s....
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....he rest and residue of the estate on trust (1) for the spread of education through newspapers magazines and periodicals (2) for effecting improvement of the quality and standard of journalism and training of personnel in journalism (3) for purchase of shares of concerns, firms, companies or from persons or persons interested in or concerned with newspapers, magazines, periodicals and otherwise in journalism (4) for publication of books and literature for masses at low and reasonable prices, and (5) for such other objects and acts that may be necessary to bring about improvement of information amongst the masses and also which may be incidental or conducive to the above objects. The trust was to be known as "Sakal Papers Trust". Although the probate of the will had been granted in 1975 to the four Executors and all four of them had been entered in the register of members of the company as joint shareholders of the 3417 shares belonging to the estate of late Dr. Parulekar on 26-4-1977, no steps were taken by the Executors to convert the shares into money till 1984. II.2 It is the claim of the respondent Nos. 2, 3 and 4 that in 1984 a company by the name of M/s. Jain Plastic Pvt. L....
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.... shares by herself/or her nominee and that her nominee was her daughter, now the sole appellant. Shanta stated that she was agreeable to pay such price as may be certified by the Auditors of the company as stipulated in Article 57A. A copy of the letter was sent by Shanta to the Board of Directors and countersigned by her daughter signifying her assent. II.7 The Company's Chartered Accountant gave notice to Shanta on 20-1-1985 stating that he had received several documents from the company pertaining to the valuation of the shares. A list of such document was given. Shanta was also called upon to submit any documents that she may desire in that connection within seven days. Shanta asked for an extension of time to submit such information. This was granted by the Auditors upto 20-2-1985. By a letter dated 20-2-1985 Shanta called upon the Auditors to submit a draft report and draft certificate within seven days in order to enable her to make her submissions in respect thereof. By a letter written on the next date, Shanta asked for copies of the documents submitted by the Company to the Auditors. There was no response to either of these letters by the Auditors who straightaway issu....
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....s." The appellant also protested against the threat held out in the letter dated 21-2-1985, to sell the shares to third parties. II.10 In response to this letter a telegram was sent by respondent No. 3 stating "Will communicate action nothing in your letter deemed as admitted." II.11 On 2-3-1985 and 1-4-1985 two suits were filed by the appellants before the Civil Judge, Pune praying for a permanent injunction to restrain the respondent Nos. 2, 3 and 4 from selling the shares contrary to the concluded contract with the appellants. The suits were rejected on 5-8-1985 by the Civil Judge on the application of the respondent Nos. 2, 3 and 4 on the ground that the subject-matter involved in the suit was outside the pecuniary jurisdiction of the Court. II.12 According to the respondents, the 3417 and 93 shares were then sold to the respondent No. 5 and his group on 9-9-1985. There is no record when the offer of the respondent No. 5 or his group had been made either to respondent Nos. 3 or 4 or to the Executors prior to the sale nor of any further notice being given in respect of the sale of the shares to the respondent No. 5 and his group to the appellant. II.13 On 16-9-198....
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....the Companies Act, 1956 was filed by the appellants. II.17 Before we close this chapter of facts on the transfer of 3417 and 93 shares, it may be noted that the District Court at Pune recalled its order rejecting the plaints in the two suits which had been filed by the appellants on a review application filed by them. The respondents challenged the order before the High Court. The High Court set aside the order of the District Court and remanded the matter to the Trial Court for re-deciding the appellant's application for review afresh. III Submissions III.1 According to the appellants once Shanta had exercised her rights under Article 57A, there was a binding contract in respect of the 3417 and 93 shares. With the exercise of the right, notice to the other shareholders as required under Article 58 being a conditional one ceased to operate. It is submitted that there was no question of the respondent Nos. 2, 3 and 4 fixing a time frame for the implementation of the concluded contract unilaterally. It is the case of the appellants that the contract had never been repudiated. The conduct of the appellants spoke to the contrary. Furthermore there was no acceptance of the repu....
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....res as a result of which the transferor would be deprived of the immediate use of the funds. According to the respondents, the contract under Article 57A would be concluded only after payment of the price. It is conceded that this particular argument had not been raised in the Courts below but being an argument on the interpretation of Article 57A, it is submitted that it should not be excluded from consideration. According to the respondents the appellant's conduct clearly showed repudiation of the contract. The appellants had failed to perform their obligation by challenging the certificate of the Auditor. It was submitted that the respondent Nos. 2, 3 and 4 were entitled to fix a time for the performance of the contract not only under section 32 of the Sales of Goods Act but also under Article 57A. By not paying the certified price for the shares, the contract came to an end. The respondents have said that by the resolution of the executors dated 7-11-1984, the three executors had been authorized to transfer the shares to a 3rd party under section 108(1) of the Companies Act. The transfer could be made by or on behalf of a shareholder. In fact the respondent Nos. 2, 3 and 4 need....
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.... shareholder to purchase the shares. The Division Bench should have considered whether there was any offer to the second appellant as a shareholder to purchase the shares. If there was not an offer to the shareholders, obviously, there was no question of the second appellant accepting the offer. But whatever offer was made whether under Article 57A or under Article 58 by the two notices, that offer was accepted by the appellant. And upon such acceptance, there was a concluded contract between the respondent Nos. 2, 3 and 4 on the one hand and the second appellant on the other. IV.1-3 The learned Single Judge correctly held that :- "The offers being both under Article 57A and Articles 58 to 64, the acceptance by the second petitioner must be deemed to be not only as a nominee, but also as a member of the first respondent-company entitled to take up the shares in her own right. There is a concluded contract to sell the shares to the second petitioner. The second petitioner was and is not an executrix or a trustee. This contract cannot, therefore, be said to be void or unenforceable." IV.2-1 Article 57A does not by itself indicate when the contract is concluded between the of....
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....nated by the lessors and the other by the lessees and, in default of agreement, by an umpire to be appointed by the valuers, a minimum purchase price being specified in the clause. When the lessees sought to exercise the option in December 1979 the lessors claimed that the option clauses were void for uncertainty and refused to appoint a valuer. The lessors also contended that the options were unenforceable as there was no contract of sale since the purchase price had not been fixed. It was held that since the contract between the parties provided that the price was to be determined by valuers, it necessarily followed that the contract was a contract for sale at a fair and reasonable price assessed by applying objective standards, and "on the exercise of the option clauses a complete contract for the sale and purchase of the freehold reversion was constituted". IV.2-4 There was thus a concluded contract which was breached by the respondent Nos. 2, 3 and 4 when they purported to sell their shares to the Pawar Group. IV.2-5 If the notices issued by the respondent Nos. 2, 3 and 4 were not under Article 58, then it was not open to the respondent Nos. 2, 3 and 4 to have sold the s....
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....erative Sugar Mills Ltd. v. Albert & Co. AIR 1981 Mad. 172. IV.3-3 Of course if time is fixed by the contract but it is not originally of the essence, a party could by notice served upon the other call upon him to complete the transaction within the time fixed and intimate that in default of compliance with the requisition the contract will be treated as cancelled (ibid p. 872). But where no time is fixed for completion, it is not open to either the vendor or purchaser to serve notice limiting a time at the expiration of which he will treat the contract as at an end. IV.3-4 In the circumstances, the contract for sale of the shares to the appellants could not be avoided by reason of any alleged failure on the part of the appellants to pay the price fixed by the Auditor. IV.4 Furthermore for an act to constitute a repudiation of a contract it must be "...such an act as indicated an intention to refuse to perform the contract and to set the other party free from performing his part... an act by which the party renounced all intention to perform his part of the contract, and thereby set free the other party... or an intimation that it was no use for you to go on, because I tel....
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....ppellant challenging the valuation of the shares by the auditors if they were not interested in completing the transaction. There would have been also no point in their offering to deposit Rs. 20 lakhs as proof of their continued interest in purchasing the shares. The filing of the suit in Pune is not conduct in keeping with an intention of not performing the contract. If the offers were in terms of Article 58, as is now contended by the respondents, then, as we have said, the acceptance of that offer must also be understood to be under Article 58. In that case, it was for the parties to negotiate the price for the shares and not for the auditors to determine. The challenge to the certification may be taken as a method of negotiating a fair value under Article 58. Be that as it may, the appellants in fact accepted the price as certified by the auditors on 1st October, 1985. IV.5 The respondents have relied on the resolution at the Executor's meeting on 27-11-1984 at which it was determined that the sale of the shares would be made. The resolution of the executors was that one of the executors could implement the sale and execute the transfer forms but did not name anyone. Before....
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....ory." (pp. 429-431) (Halsbury's Law of England, 4th edn., Vol. 7, para 1632, Palmers Company Law, 24th Edn., P. 638, Jarnail Singh v. Bakhshi Singh [1960] 30 Comp. Cas. 192 (Punjab), L. Janakirama Iyer v. P.M. Nilakanta Iyer 1962 Suppl. (1) SCR 206.) IV.5.4 The power to act by majority qua executors and authorizing someone to act as a shareholder on another's behalf are distinct. There is no question of transferring shares by signature of a majority. Whatever the agreement between the executors was inter se, the agreement could not override the provisions of the Companies Act and under section 108 the Company is bound to recognize only those transfers for the purpose of registration which are executed in terms of that section. It is true that they were in fact executors, and that, with regard to the beneficiaries mentioned in the will, they would be trustees of the stock, but the company does not take notice of any trust, and must act in accordance with the Act of Parliament, under which it is constituted, with regard to placing persons upon the register - Barton v. London & North Western Railway Co. 1889 (24) QBD 77 (CA). IV.5.5 Even if the four executors had wanted regis....
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.... member entitled to attend and vote is entitled to appoint a proxy or, where one or more proxies are allowed, to attend and vote instead of himself and that the proxy need not be a member of the Company." IV.6.2 In the notice for the meeting held on 21st September, 1985, there was no mention whatsoever, let alone a statement, relating to the transfer of the 3417 and 93 shares to the Pawars. At the same meeting, the respondent Nos. 5 and 10, were appointed as Additional Directors although their shares were not yet entered in the Company's register of members. IV.7 As we have found several legal infirmities in the sale of the 3417 and 93 shares to the Pawars, it is not necessary to consider whether the respondent No. 5 and his group were purchasers of the shares. IV.8 The Division Bench erred in holding that the violation of section 108 was ratified at the Board Meeting held on 13th October, 1985. Ratification is possible in respect of an act which is incompetent, by a person who would have been competent to do such act. The violation of section 108 could not be ratified by the Board of Directors as the act was one which the Board was incompetent to allow. The Board of Direc....
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....ded only by two of the four Executors. Shanta could not attend because she was ill. Her prayer for adjournment was rejected by the two executors on the ground that her interest would not be jeopardized since she would be given notice under Article 57A. It was then resolved that notice should be given under Article 57A to Shanta. If she exercised her right under that Article, the executor was to sell the shares to her at Rs. 2,250 per share. If she did not agree to purchase the shares at the price of Rs. 2,250 then the price should be fixed in accordance with Article 61. The resolution further records that only if Shanta did not buy the shares at such fixed price then the executors "do sell the shares to any other person or persons at or for the price of Rs. 2,250 per share". Since the meeting was not adjourned because Article 57A protected Shanta, it follows that if Shanta's rights were not to be protected under Article 57A, then the meeting should have been postponed. IV.9.5 Indeed the matter was referred to the company's auditors in purported compliance with Article 57A. Certification of the price was made by the auditors also under that Article. The notice of the respondent N....
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....n would be granted. On 9-11-1985 a letter dated 7-11-1985 was sent to the company by Modular Finance and Consultancy Private Limited (the respondent No. 12 before us and a member of Pawar Group) proposing that the share capital of the company be increased and requesting the issue to be decided at an ensuing AGM. On 11-11-1985 a letter was also received by the company from the United Western Bank advising the company in view of its expansion programme, to increase its share capital. V.3 According to the respondents, the increase was by reason of the urgent need of the Company to purchase machinery. We are unable to agree. The purchase of the machinery was in contemplation of the company from much prior to the date of the notice. The alleged letter from the Ministry of Finance was not produced before the High Court and we are not prepared to allow the same to be brought on record at this stage. V.3.1 The Division Bench affirmed the finding of the learned Single Judge that the need to increase the issued capital from Rs. 7,33,400 to Rs. 25 lakhs was not established. Indeed the Division Bench went on to find that the action of issuing the increased share capital clearly indicated....
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....at the meeting was held in half an hour from the time the Act passed and before the shareholders could have had a proper opportunity of learning the particulars of what the Legislature had authorized, their Lordships are of opinion that the notice was bad, and that what was done was consequently ultra vires". (p. 282) V.4.4 Again in Baille v. Oriental Telephone & Electric Co. Ltd. (1915) 1 Ch.D. 503 (CA) it was said by the Court of Appeal : "...I feel no difficulty in saying that special resolutions obtained by means of a notice which did not substantially put the shareholders in the position to know what they were voting about cannot be supported, and insofar as these special resolutions were passed on the faith and footing of such a notice the defendants cannot act upon them." (LIC of India v. Escorts Ltd. [1986] 1 SCC 264 at p. 343) V.5.1 The respondents have relied on Article 94(e) which says that "the company shall also carry out the requirements of section 188 of the Act" to contend that due notice was given under Article 94 because the letter of Modular Finance had been forwarded to the shareholders. V.5.2 Section 188 provides that a meeting could be requisiti....
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....ht to ensure their position in the company is evident from the fact that a Board Meeting was held immediately after the Annual General Meeting on 16-11-1985 at which the Board resolved to issue the additional 17,666 shares at par to the Pawar Group. There was no notice given of the Board meeting at all. V.6.1 The Respondent Company was bound to offer the further shares on a fresh issue of capital to the existing equity shareholders in proportion to the capital paid up on the shares at that date. The Division Bench noted that this was provided in section 81 of the Companies Act. However, because section 81(3) does not apply to a private limited company (which the company was at that stage) and since according to the Division Bench, the Articles of Association did not require such further issue of shares to be allotted in any particular manner to the existing shareholders, the allocation of the further issue to the respondent No. 5 and his group was not illegal or contrary to law. V.6.2 As a matter of fact the finding as to the absence of such a requirement in the Articles of Association of the Company was erroneous. Increase of share capital is dealt with in Articles 14 and 15....
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....r by deletion of the names of the Pawar Group as shareholders in the company. The learned Single Judge merely directed the Board of Directors to dispose of the fresh shares, one can only assume, in accordance with the Articles of the Company and the Act. VI.3 Having effectively held on all issues in favour of the appellant the question remains as to whether we should, in exercise of our discretion under section 155, grant the appellant the relief of rectification of the shares as claimed. Although the logical conclusion of our findings would be to set aside the transfers and restore the status quo ante, the question is should the share register of the company be directed to be rectified now in respect of shares, the impugned transfer of which took place more than 20 years ago ? The respondents have submitted in the course of the hearing that this Court should not in any event disturb the status quo but should mould the relief by awarding compensation, if necessary as prayed for by the appellant. They have referred to the decision in Needle Industries (India) (P.) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 3 SCC 33 in support of this submission. We agree. There h....