TaxTMI 
TaxTMI 
2008 (7) TMI 569
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....C.P. No. 5/2007) filed by respondent Nos. 1 and 2 under sections 397, 398 of the Act, upon hearing C.A. No. 59/2007 whereby the maintainability of the said petition was challenged by the appellants. The Board has directed CA No. 59/2007 to be considered along with the company petition. 2. Late Sh. V.P. Punj was holding 980 equity shares out of the total 1000 Equity Shares issued by the appellant company. The remaining 20 equity shares were held by respondent No. 2 herein, Sh. P.N. Suri. Shri V. P. Punj expired on 8-10-2006. According to respondent Nos. 1 and 2, he left behind a Will dated 8-4-2005 bequeathing all his assets in favour of respondent No. 1 herein. Respondent No. 1 approached the Company for transmission of 980 shares in his favour. He was informed that late Sh. V.P. Punj had pledged the said 980 shares in favour of Sh. Nilender Prakash Punj who was respondent No. 2 in the company petition before the Board, and is respondent No. 3 in the present appeal. It was the stand of the company that as a pledgee respondent No. 3 herein had already got the shares transferred in his name and as such the respondent No. 1 was not entitled for transmission of these shares in his n....
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....d all his shares in the Company in favour of respondent No. 3 by handing over the original share certificates to him. Late Sh. V.P. Punj had confirmed the pledge and the handing over the share certificates by his letter dated 15-4-2002. In the same letter he had also nominated respondent No. 3 herein in respect of the shares held by him. Since late Sh. V.P. Punj had not repaid the loan before his death, and the respondent No. 3 herein was also named as the nominee in respect of the 980 shares held by him, on the demise of late Sh. V.P. Punj the shares had been transferred in favour of respondent No. 3 herein. In terms of section 109A of the Act, a nominee of shares becomes entitled to the shares of the deceased and such nomination overrides the law of testamentary and intestate succession. Consequently, on the basis of the 'Will' of late Sh. V.P. Punj, Respondent No. 1 could not make any claim in respect of the 980 shares and he could not be considered to be entitled to become a member of the Company and therefore was not entitled to maintain the petition. In respect of respondent No. 2, it was argued that after the demise of late Sh. V.P. Punj, the Company had issued and allotted ....
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.... mandatory notice to the pledger had not been given, the appropriation of the pledged goods, namely, the shares was null and void. The said respondents also disputed the authenticity of the letter dated 15-4-2002 attributed to late Shri V.P. Punj and argued that the said communication, in any event, did not constitute a nomination in terms of section 109A of the Act since it was not in the prescribed form. Unless the nomination had been made in the prescribed form, the purported nomination cannot be held to be valid. Reliance was placed on Nazir Ahmed v. King Emperor AIR 1936 PC 253(2) wherein it had been held that where a certain thing is prescribed to be done in a certain way, the thing must be done in that way or not at all. A mere statement in a letter stating that someone had been nominated could not be taken cognizance of by the company. Reliance was also placed on Smt. Sarbati Devisha Devi v. Usha Devi AIR 1984 SC 346 to contend that a nominee merely holds the property of the deceased for the benefit of the legal heirs of the deceased who are entitled to succeed, to the estate of the deceased. It was argued that even if one were to assume that there was a valid nomination, t....
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....e Contract Act a notice is required to be given to the pledger before the goods pledged could be appropriated by the pledgee, in the present case since late Shri V.P. Punj had died before the pledge could be redeemed, there was no question of issuance of notice to him. They also relied on the nomination allegedly created in favour of Respondent No. 3 herein in respect of the said shares. It was argued that the form in which the nomination is to be done is only procedural and, therefore, directory. The substantive provision of section 109A was that once a nomination is made the same takes effect even if the same is not in the prescribed form. On a reading of the letter dated 15-4-2002 of late Shri V.P. Punj it was clear that he had intended to nominate Respondent No. 3 herein in respect of the said 980 shares and a copy of the letter had also been endorsed to the company. The company had acted in terms of that letter. Consequently Respondent No. l could not claim the said shares of late Shri V.P. Punj on the basis of the alleged Will. 9. Insofar as allotment of additional shares is concerned the appellants and Respondent No. 3 contended that in the Board Meeting held on 17-8-2006....
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....t the validity of the foreclosure without notice in terms of section 176 of the Contract Act also required to be examined. Only in their rejoinder the applicants in CA No. 59/2007 enclosed a copy of the Board resolution dated 16-10-2006 from which it transpired that 980 shares in question had been transmitted in the name of Respondent No. 3 herein on the basis of nomination. Along with the rejoinder the applicants had enclosed in a sealed cover only a photocopy of the alleged letter dated 15-4-2002 when a question was raised about the alleged nomination being in order, in terms of section 109A of the Act. The Board also recorded that when the applicants produced the original of the said letter, the Respondent Nos. 1 and 2 had disputed the signatures of the deceased on that letter. Thus the validity of the transfer/transmission of the said 980 shares in the name of Respondent No. 3 herein was required to be examined to determine whether Respondent No. 1 was not entitled to the said shares. 11. Insofar as allotment of additional shares in favour of two incorporated companies and the transfer of shares to two other incorporated companies is concerned, the Board observed that the va....
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....and 2, since Respondent No. 1 based his claim on an unprobated 'Will' when, admittedly, he had a sister who was litigating with him in respect of estate of late Shri V.P. Punj. He submitted that the Board wrongly applied the ratio of Margret T.D'sor (supra) in the facts of the present case. Sh. Chandhiok also relied on various other decisions in support of his submissions to which I shall refer to a little later. 14. Sh. U.K. Chaudhary, learned senior Advocate appearing on behalf of Respondent No. 3 argued that the Board of Directors of the company had passed a resolution on 16-10-2006 wherein the nomination made by late Shri V.P. Punj on 15-4-2002 was taken note of, and the request of respondent No. 3 herein for registration of Respondent No. 3 as a member of the company in respect of the 980 shares held by late Shri V.P. Punj was approved. He argued that the dispute regarding the validity and genuineness of the nomination could not be gone into in the proceedings under sections 397 and 398 of the Act. He also referred to the observation of the Board in paragraph 8 of the impugned order to the effect that the letter of late Shri V.P. Punj dated 15-4-2002 had not been disclosed ....
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....prescribed form. He also referred to the form in which the nomination is required to be made which is contained in Form No. 2B. Sh. Shakdher also referred to the provisions contained in Order XIV, Rule 2(2) of the Code of Civil Procedure to contend that the company petition could be disposed of at the initial stage on the ground of maintainability, only if the Board was of the opinion that the said issue was a pure issue of law and did not involve an issue of fact or a mixed issue of fact and law. He argued that in the facts of the present case it could not be said that only issues of law arose on the basis of which maintainability of the petition could be determined. He also relied on various decisions in support of his case which shall be referred to in the course of my discussion. 16. Having considered the rival submissions, I am inclined to dismiss this appeal since I do not find merit in the submissions of the appellants. In Jer Rutton Kavasmaneck v. Gharda Chemicals Ltd. [2001] 106 Comp. Cas. 25 ^1, the Bombay High Court has taken the view that a petition under section 397 can be thrown out only if the case put forward is unarguable. The petition can be held demurrable onl....
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....s India Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp. Cas. 743 (SC); also see [1974] AC 821 (PC); [1903] 2 Ch. 506 (Ch. D)]. 19. I find merit in the submission of Respondent Nos. 1 and 2 that it is for the board to decide in its discretion whether an issue sought to be raised as a preliminary issue by one of the parties ought to be decided as the preliminary issue, or at the final hearing of the case. In Mithlesh Kumari v. Gaon Sabha, Kishanpur AIR 1999 All. 304, the Allahabad High Court noticed the principle that it was not obligatory on the Court to try an issue as a preliminary issue as sub-rule (2) of Rule 2 of Order XIV CPC leaves discretion in the Court to try an issue as a preliminary issue. In this regard reliance was placed on Dhirendranath Chandra v. Apurba Krishna Chandra AIR 1979 Pat. 34 and Usha Sales Ltd. v. Malcolm Gomes AIR 1984 Bom. 60. On the same lines is the decision of the Gujarat High Court in Kaushiklal Nanalal Parikh v. Mafat Lal Industries Ltd. AIR 1995 Guj. 115. In this case an issue of jurisdiction of the Court had been raised. The Trial Court allowed the application of the defendant for treating the issue of jurisdiction as a pr....
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.... determine the question of limitation at the preliminary stage. Therefore, if facts in the company petition are disputed the question of limitation could not have been determined at a preliminary stage without a decision on facts after the parties had been given an opportunity to adduce evidence. The Supreme Court also held that the Civil Procedure Code confers no jurisdiction on Courts to decide mixed question of fact and law as preliminary issues, unless the facts are clear from the plaint itself and the mixed question of fact and law can be determined on the principle of demurrer. Where a decision on an issue of law depends upon a decision of fact, it cannot be tried as a preliminary issue. 21. In the present case on a reading of the company petition it cannot be said on the principle of demurrer that the same is not maintainable at the instance of Respondent Nos. 1 and 2. The averments made in paragraphs 7, 8, 23, 25, 29, 30, 33, 46 and 47 on the principle of demurrer have to be accepted as correct to examine whether the company petition could have been rejected at the threshold. The relevant averments contained in these paragraphs are reproduced hereunder : "7. It is imp....
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....r and chairman of the Company and had the controlling interest. It would, therefore, be wrong to insist that their names must be first put on the register before they can move an application under sections 397 and 398 of the Act. This would frustrate the very purpose of the necessity of action ? 9. That the Petitioner No. 2 is a minority shareholder with 2 per cent shares in the Respondent Company. All the shares held by the Petitioner No. 2 are fully paid up and no calls or any other amount is outstanding or payable in respect thereof. He is therefore entitled to file this petition along with Petitioner No. 1 challenging the acts of oppression and mismanagement by the Respondent Nos. 2, 3 and 4, whereby his shareholding has been reduced from 2 per cent to 0.5 per cent by allotment of further shares in a board meeting, which are in gross violation of the provisions of the Companies Act, 1956 and the Articles of Association of the Respondent Company. The Petitioner No. 2 is also aggrieved by the act of the Respondent Nos. 2, 3 and 4 whereby Annual General Meeting is purportedly shown to be was held on 26-9-2006, without any notice to him and without his participation. 23. That....
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....ty shareholder of the Respondent Company. Petitioner No. 1 was shocked when, under the direction of Respondent Nos. 2, 3 and 4 he was stopped by the security personnel outside the building and entry was denied to him. It was only after a lot of persuasion that he was allowed to enter the premises. 33. That Mr. V.P. Punj had kept his equity share certificate for the 980 shares held by him in the Respondent Company along with other confidential papers during his life-time in trust with Respondent No. 2. But when Petitioner No. 1 in the capacity of the legal heir of his father demanded the share certificates and other documents from Respondent No. 2, who in no uncertain words told Petitioner No. 1 that nothing would be given to him vis-a-vis M-13, Connaught Place as well as Respondent Company. 46. That it is the humble submission of Petitioners that the fresh allotment of shares to M/s. Nitam Investment Pvt. Ltd. and Muller Investments Pvt. Ltd. is in total contravention of the provisions of Articles of Association namely clauses 5 and 8. It is further submitted that as per Form 2 the new shares were allotted on 17-8-2006 by way of a board meeting that is much prior to the date ....
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....rs of the Company and to reduce the shareholding of Petitioner No. 1 to minority by taking advantage of the demise of Mr. V.P. Punj and absence of Petitioner No. 1. The Respondents have no authority and power to increase the share capital of the Respondent Company by passing resolution in their meeting and the increase in share capital is in gross violation and in utter disregard of the provisions of the Articles of Association and the Companies Act, 1956. The fresh allotment has caused irreparable damage to Petitioner No. 2, the minority shareholder of the Respondent Company, whose shareholding has been reduced from 2 per cent to 0.5 per cent. The documents filed with the Registrar of Companies showing the increase in the share capital in the month of August are all fudged and fabricated. It is important to mention here that that Respondent Nos. 2, 3 and 4 who are directors of the Respondent Company may have manipulated the minutes book of the company to show the board meeting prior to the death of Mr. V.P. Punj showing allotment of shares to new entities." 22. If the above averments are assumed to be correct not only it cannot be said that Respondent Nos. 1 and 2 do not dis....
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.... Punj, but also to ignore the claim of the legal heirs of the deceased member. Above all, it has chosen to also stoutly defend its action even when it is confronted with an undisputed and registered 'Will' in favour of a Class-I heir of the deceased member. In Malleswara Finance and Investments Co. (P.) Ltd. v. Company Law Board [1994] 81 Comp. Cas. 66 (Mad.), the Board had set aside the allotment of additional shares as invalid in a petition under sections 397, 398 of the Companies Act. It also directed the deletion of the name of the petitioner, Malleswara, who was the declared pledgee of shares held by one 'B' from the Register of Members and directed 'B' to immediately repay the loan to Malleswara, in respect of which the pledge was created. One of the arguments of Malleswara before the Madras High Court was that the action of the Board tantamounted to proceedings under section 111 of the Companies Act for rectification of the Register of members. The Madras High Court rejected this submission holding that once the allotment had been set aside by the Board, there was no scope for invoking section 111. The proceedings did not get converted into one under section 111. Therefore, ....
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....s created special remedies, such as those under sections 397 and 398 of the Act, to relegate an aggrieved party to an ordinary civil remedy. 26. The appellants and respondent No. 3 have relied on the following decisions to contend that where there are serious disputes with regard to the title in the shares, the parties should be relegated to a civil suit and a petition under section 111 is not an appropriate remedy. These decisions are :- 1.National Insurance Co. Ltd. v. Glaxo India Ltd. [1999] 20 SCL 243 (Bom.). 2.Public Passenger Service Ltd. v. M.A. Khader AIR 1962 Mad. 276. 3.Bipin K. Jain v. Savik Vijay Engg. (P.) Ltd. [1998] 91 Comp. Cas. 835 ^1. (CLB - Chennai) 4.Smt. Kamla Devi Mantri v. Grasim Industries Ltd. [1990] 69 Comp. Cas. 188 (MP). 27. In National Insurance Co. (supra), the respondent company, in answer to a rectification petition filed by National Insurance Co. Ltd. took the stand that it had not received the share certificates in respect of 6050 shares from Stock Holding Corporation of India Ltd. (SHCIL) and therefore, it refused to register the transfer in respect of those shares (and consequent rights and bonus issue shares) in the name of the....
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....rty or outsider is involved to determine the issue with regard to the validity of the nomination attributed to late Sh. V.P. Punj other than Respondent No. 3, the appellant company, and respondent Nos. 1 and 2. Therefore, the decision in National Insurance Co. Ltd. (supra), in my view, has no relevance in the facts of this case. 29. The decision in the Public Passenger Service Limited (supra) is also of no assistance to the argument of the appellants. The Supreme Court in this decision held that 'Where by reason of its complexity or otherwise the matter can more conveniently be decided in a suit, the Court may refuse relief under section 155 of the Act and relegate the parties to a suit'. This decision does not state that in every case, wherein dispute is raised, the parties should be relegated to a suit. It is to be examined in the facts of each case whether the disputed questions of facts are so complicated as to relegate the parties to a civil suit. Pertinently, in the facts of the case before the Supreme Court, the Court concluded that the issue of validity of the notice dated 20-1-1957 could well be decided summarily and held that the Courts below rightly decided to give re....
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....hat taking a view that only the registered members could maintain a petition under sections 397 and 398 of the Act would be to take a hyper technical view. It would not advance the cause of equity and justice. 33. Pertinently, the fact that the respondent No. 1 is the son of late Shri V.P. Punj and that he is a Class-I heir in respect of the estate of late Shri V.P. Punj is not in dispute. Neither is a dispute raised, nor could any have been raised by the appellants, or respondent No. 3, with regard to the registered 'Will' of late Shri V.P. Punj which purports to bequeath, inter alia, the shares in question in favour of respondent No. 1. Like in Margret TD'sor (supra), in the present case as well the vesting of the estate of the deceased shareholder late Sh. V.P. Punj in respondent No. 3 is alleged to be illegal and wrongfully effected on the ground that the nomination is alleged to be invalid. The estate of late Shri V.P. Punj is entitled to be represented through respondent Nos. 1 and 2 to determine the issue whether there was a valid nomination made by late Sh. V.P. Punj, since respondent No. 1 is directly and substantially affected by the determination of that issue one way....
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....t the case of respondent No. 3 that there is any other 'Will' of late Sh. V.P. Punj in his favour or that there is any other claimant laying a similar claim in respect of the said 980 shares on the basis of any other 'Will' of late Sh. V.P. Punj. For the said reason in my view, the decision of the Supreme Court in Bina Paniker Chaudhary v. Satvabrata Basu [2006] 10 SCC 442 has no applica-tion in the facts of this case, since the real issue that arises for consider-ation before the Board is with regard to the validity of the nomination set up by respondent No. 3 and its acceptance by the appellant company. The decision of this Court in Channo Devi v. DDA [2000] 86 DLT 213 on the face of it is distinguishable since in that case there was an inter se dispute between two successors of the deceased. The 'Will' set up by the petitioner was disputed by another heir of the same class and, therefore, the Delhi Development Authority directed the petitioner to obtain a probate of the 'Will'. This action of the DDA was upheld by the Court. However, in the present case, respondent No. 3 is neither a Class-I heir like respondent No. 1 nor has he set up a claim by way of testamentary succession i....
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....on the death of the shareholder or holder of debentures of, the company or, as the case may be, on the death of the joint-holders become entitled to all the rights in the shares or debentures of the company or, as the case may be, all the joint-holders, in relation to such shares in, or debentures of the company to the exclusion of all other persons, unless the nomination is varied or cancelled in the prescribed manner. (4) Where the nominee is a minor, it shall be lawful for the holder of the shares, or holder of debentures, to make the nomination to appoint, in the prescribed manner any person to become entitled to shares in, or debentures of, the company, in the event of his death, during the minority. "109B. Transmission of shares.-(1) Any person who becomes a nominee by virtue of the provisions of section 109A, upon the production of such evidence as may be required by the Board and subject as hereinafter provided, elect, either- (a)to be registered himself as holder of the share, or debenture, as the case may be; or (b)to make such transfer of the share or debenture, as the case may be, as the deceased shareholder or debenture-holder, as the case may be, could hav....
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....ember desires to make a nomination, it is required to be made 'in the prescribed manner' by virtue of sub-section (1) of section 109A and the nomination would have an overriding effect 'where a nomination is made in the prescribed manner'. Even the variation or cancellation of an earlier nomination has to be made in the prescribed manner. In Shin-Etsu Chemical Co. Ltd. v. Aksh Optifibre Ltd. [2005] 63 SCL 1 (Mag.) the Supreme Court, while dealing with section 45 of the Arbitration and Conciliation Act, 1996 obeserved as follows :- "29. If the requirements of a statute which prescribes the manner in which something is to be done are expressed in negative language, that is to say, if the statute enacts that it shall be done in such a manner and no other manner, it has been laid down that those requirements are in all cases absolute, and that neglect to attend to them will invalidate the whole proceeding." 40. The submission of Mr. Shakdher based on Sarbati Devi ( supra), that a nominee merely holds the estate of the deceased for the benefit of the legal heirs of the deceased, and that the legacy does not vest in the nominee does not appear to be correct, in view of the express ....
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........................................ Name :............................................... Address :............................................... Date : ...............................................' From the aforesaid it is evident that the nomination is required to be attested by witnesses. 41. Keeping in view the fact that section 63 of the Indian Succession Act requires an unprivileged 'Will' to be attested by at least two witnesses in a particular manner, and that the purport of section 109A is to override even a 'Will' so executed, the requirement of attestation by a witness of a nomination made by a shareholder, in my view cannot be said to be merely procedural or directory. To construe the requirement of attestation as merely directory in respect of a nomination made by a share-holder/debenture holder would not be in consonance with section 63(c) of the Indian Succession Act, and would also be contrary to the express language of section 109A of the Act. It appears that the only departure made under the Act from the general law of testamentary succession is that the attestation of the nomination need not be in the same manner in which it is so required to ....