TaxTMI 
TaxTMI 
2015 (2) TMI 644
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....that none of the partners could sell his/her respective share in the firm without offering it first to the other partners. 3. On 6th March, 1967, a private limited company was incorporated with the principal object of taking over the assets and liabilities of the above-mentioned partnership as a going concern. Article 57 of the Articles of Association contained restrictions on the rights of all the shareholders to transfer their shares. Any shareholder desiring to sell his shares must offer his shares to the other shareholders of the company pro rata to the holding of each of such other members respectively at a fair value. "57. Save as aforesaid the following provisions shall apply to the transfer of shares - (a) A member of the company may transfer a share to his lineal descendent, but save as aforesaid no share shall be transferred to a person who is not a member of the company so long as any member is willing to purchase the same at the fair value as hereinafter provided. (b) The member proposing to transfer any shares (hereinafter called the proposing transferor) shall give notice in writing (hereinafter called a transfer notice) to the Company th....
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.... to the transfer of such shares accordingly. (g) For the purpose of this clause the fair value of the share shall be such sum, if any, as the auditors for the time being of the Company shall certify as the fair value thereof provided that it expressly declared that the fair value shall be (1) the amount of capital paid upon thereon plus (2) a sum bearing the same proportion to the value as appearing in the company's last balance sheet of any reserve fund or other fund of the company as the capital paid up on all the shares of the company for the time being issued plus or minus as the case may be, (3) a sum bearing the same proportion to the value as appearing in the profit and loss account consisting of or representing undivided profits or losses as the capital paid up on such share bears to the total capital paid up on all the shares of the company for the time being issued." 4. With effect from 17th August, 1988, the first respondent company became a public company (under Section 43A (1A) of the Act) as its turnover exceeded the limit prescribed thereunder: "43A. ****** ****** ****** ****** ****** ****** (1A) Without prejudice to the provisions of sub-section....
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....re at that time valued at approximately 1600 crores. The appellant, therefore, filed a Company Petition No. 132/397- 98/CLB/MB/2009 (hereinafter referred to as the Company Petition 132 of 2009) before the Company Law Board, inter alia, seeking prohibitory orders "That this Hon'ble Bench be pleased to grant a permanent order and injunction restraining the 2nd/3rd respondents by themselves or through their servants and or agents, directly or indirectly, from selling, transferring, alienating, dealing or disposing the shares held, directly or indirectly, by the 2nd/3rd Respondents in the 1st Respondent to any person without first offering the same to the Petitioners at the fair value quantified in accordance with Article 57(g) of the Articles of Association of the 1st Respondent." against the 2nd and 3rd respondents from committing breach of the pre-emption agreement contained in Article 57 of the Articles of Association referred to supra. On 11th December, 2009, ad-interim injunction order was passed by the Company Law Board restraining the second respondent from alienating his share without permission of the Company Law Board. However, the Company Petition No. 132 of 200....
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.... the first respondent continued to be a private company or became a public company, But whether the amendment made by the Act 53 of 2000 to Sections 3 and 43A destroys the rights and obligations created by Article 57 of the Articles of Association of the first respondent company. 10. The case of the appellants all through has been that notwithstanding the amendment of the Act by the Amendment Act 53 of 2000, Article 57 of the Articles of Association still governs the rights of the members of the first respondent Company. 11. On the other hand, the case of the respondents has always been and is that the first respondent company is a public company having had become so by the operation of law i.e., Section 43A(1) and it cannot now become a private company. There is nothing in the Amendment Act 53 of 2000 which automatically renders a public company created under Section 43A to become a private company. It is also the case of the respondents that the failure to amend the Articles of Association to give effect to Section 3(1)(iii)(d) ipso facto make the first respondent a public company thereby rendering Article 57 inoperable. 12. We shall deal with those arguments later in th....
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....e provided. In the case of a private company other than a company having share capital only matters specified in clauses (b) and (c) of the above sub-section are to be stipulated. 15. Part-II of the Act deals with incorporation of company and matters incidental thereto. A brief survey of the said Part insofar as it is relevant for the purpose of this case is necessary. 16. Section 12 deals with the mode of forming incorporated companies, either public or private. It stipulates that an incorporated company may be formed by two or more persons in the case of a private company and seven or more persons in the case of a public company by subscribing their names to a memorandum of association and complying with other requirements of the Act in respect of registration. 17. Section 26 of the Act mandates inter alia that in the case of a private company limited by shares, there shall be registered (along with the memorandum), Articles of Association signed by the subscribers of the memorandum. Such Articles of Association must prescribe the regulations for the company. "Section 26. Articles prescribing regulations.-There may in the case of a public company limited by shares, an....
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....ny by virtue of Section 43A(1), the company shall inform the Registrar that it has become a public company. It also mandates that the Registrar shall make necessary consequential alterations of the records. 23. The language and implication of sub-section (2) will be examined later in the judgment. 24. We are not concerned with sub-Section (3). Sub-Section (4) contemplates the possibility of a private company which becomes public company by virtue of the operation of Section 43A once again becoming a private company. It stipulates that any private company which becomes a public company by virtue of Section 43A(1) shall continue to be a public company, until such time it becomes a public company in accordance with the provisions of the Act. Such a re-conversion requires the approval of the Central Government. "(4) A private company which has become a public company by virtue of this section shall continue to be a public company until it has, with the approval of the Central Government and in accordance with the provisions of this Act, again become a private company." 25. Sub-section (5) provides for penalties for defaults in complying with the mandate of sub-Section (2). ....
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....panies (Amendment) Act, 1974, or (b) where the aforesaid percentage has been first so held before the commencement of the Companies (Amendment) Act, 1974 on and from the expiry of the period of three months from the date of such commencement, unless within that period the aforesaid percentage is reduced below twenty-five per cent of the paid-up share capital of the public company, become, by virtue of this sub-section, a public company, and thereupon all other provisions of this section shall apply thereto : Provided that even after the private company has so become a public company, its articles of association may include provisions relating to the matters specified in clause (iii) of sub-section (1) of section 3 and the number of its members may be, or may at any time be reduced, below seven." 30. Sub-sections (9) to (11) of Section 43A came to be inserted by various amending acts. The complete details of the contents of all these sections and their legislative history is not necessary for us except to note that in the explanation appended to sub-section (9), the expressions "relevant period" and "turnover" occurring in sub-Section (1) and (1A) are defined as follows:....
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.... "Provided that even after the private company has so become a public company, its articles of association may include provisions relating to the matters specified in clause (iii) of sub-section (1) of section 3 and the number of its members may be, or may at any time be reduced, below seven." 34. Each one of these provisos declare that even after a private company becomes a public company by virtue of the operation of any one of the four sub-Sections i.e. (1), (1A), (1B) and (1C) of Section 43A; the Articles of Association of such company may include provisions relating to the matters specified in Section 3(1)(iii). The provisos further declare that the number of members of such company "may be or may at any time be reduced, below seven". The implications of the provisos require an examination. 35. The provisos permit the continuance of stipulations in the Articles of Association of such public companies which relate to the matters specified in Section 3(1)(iii). In other words, though the companies whose Articles of Association provide for matters specified in Section 3(1)(iii) are private companies, and under the scheme of the Companies Act a public company cannot have ....
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.... constituting a company a private company - Where the articles of a company include the provisions which, under clause (iii) of subsection (1) of section 3, are required to be included in the articles of a company in order to constitute it a private company, but default is made in complying with any of those provisions, the company shall cease to be entitled to the privileges and exemptions conferred on private companies by or under this Act, and this Act shall apply to the company as if it were not a private company : Provided that the Central Government, on being satisfied that the failure to comply with the conditions was accidental or due to inadvertence or to some other sufficient cause, or that on other grounds it is just and equitable to grant relief, may, on the application of the company or any other person interested and on such terms and conditions as seem to the Central Government just and expedient, order that the company be relieved from such consequences as aforesaid. 39. Therefore, these four provisos give an option to the company either to retain the original Articles of Association or alter them, but there is no statutory compulsion to alter the Articl....
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....y as evidenced by the certificate referred to above, with effect from 17th August 1988, then, the amendment made in 2000 would be applicable and section 43A ceases to apply to it. That the words "On and After", are used makes no difference as far as present case4 is concerned. In the present case, the status of the first respondent as a public company remains and it is now academic to find out whether it was a deemed public company earlier as contended. Once the law makes only a broad categorization as noticed above, then, it is not necessary to deal with this contention any more." The High Court then went on to examine whether there can be any restriction on the shareholder's right to transfer shares in a public company. The High Court reached a conclusion that in view of the subsequent statutory amendments made in 1988 and 2000 to the Companies Act, Article 57 of the Articles of Association of the first respondent company would no longer govern the rights of its shareholders to transfer their shares. "After 17th August 1988 and in any event after dated 13th December 2000, the position has undergone a change and Article 57 appearing in the Articles of Association would no lo....
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.... given up and has not been pursued." 48. The reasons which led to the above extracted conclusions of the High Court are as follows: A) Section 43A prior to its amendment by Amendment Act 53 of 2000 only provided for various situations in which a private company becomes a public company by operation of law but not vice-versa. "112. ... In other words, this section permitted a private company to become a public company in certain cases and once the word private is deleted it becomes a public company. However, there was nothing which permitted such public company to again become private company and that is achieved by insertion of section 43(2A). B) The High Court also opined that in view of the declaration contained under sub-section (11) of section 43A, which was inserted by the Amendment Act 53 of 2000, the entire Section 43A becomes inoperative w.e.f. 13.12.2000 (the day on which the Amendment Act came into force) except for sub-section (2A). Thereby "the concept of deemed public company under Section 43A" has "been abolished". "112. ........ Sub-section 43A(11) which also was inserted by Act 53 of 2000 from 13th December 2000, clarified that nothing contained in se....
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....itional clause (d) was defeated, then, there is no scope to alter the status of the respondent No.1 company by either terming it as a deemed public company or a public company retaining the fundamental and basic character of a private company. Both these concepts are unknown to law." 49. SUBMISSIONS BY THE APPELLANTS: (i) On a plain reading of sub-Section (11), it is clear that Section 43A is retained on the statute book and not deleted by the Companies (Amendment) Act, 2000. Had the Parliament intended to completely efface all Section 43A companies, the surest manner would have been to delete Section 43A from the statute. The retention of Section 43A is an extremely strong indicator of the legislative intention to continue recognition of existing "hybrid companies" even after 13.12.2001. (ii) This legislative intention is made clear by the insertion of clause (11) in Section 43A by the Companies (Amendment) Act, 2000 which reads: "(11). Nothing contained in this section, except sub-section (2A), shall apply on and after the commencement of the Companies (Amendment) Act, 2000." The expression "nothing contained in this section .. shall apply on and after", coup....
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....he company and the members thereof to the same extent as if they respectively had been signed by the company and by each member, and contained covenants on its and his part to observe all the provisions of the memorandum and of the articles. (2) All money payable by any member to the company under the memorandum or articles shall be a debt due from him to the company." The Articles are the foundation on the basis of which shareholders of the company deal with each other. In the case of a company such as the Respondent No.1, the application of Section 43A did not in any manner disturb the existing arrangements among the shareholders but added on certain regulatory requirements. Assuming (whilst denying) that Section 43A stood effectively "repealed" on and after 13.12.2000, there is nothing to suggest that the intention of the legislature was to completely disrupt the foundational arrangement amongst shareholders across the country in tens of thousands of private limited companies. In other words, assuming there was a repeal, the status of every deemed public company reverts back to a private company and not a public company. Should the status of every hybrid company subs....
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....HE RESPONDENTS: (i) With the introduction of the Amendment Act of 2000 on 13th December 2000, an existing private company that does not have clause (d) in its articles becomes a public company. Any other construction of the amendment would result in the creation of two classes of private companies leading to discriminatory results. (ii) Neither the definition in Section 3(1) nor the other subsections of Section 3 carve out an exception from the operation of clause (d) to companies existing on 13.12.2000; and do not prescribe a time limit for insertion of the provisions to give effect to clause (d) in the Articles of Association. Therefore, such non-inclusion necessarily led to the result (by operation of law) that all such private companies become full-fledged public companies on 13.12.2000 until they amended their articles to include the provisions of clause (d). (iii) Section 43A (1C) was introduced to regulate the unhealthy practice of accepting deposits from the public by private companies. The only legal consequence of Section 43A(1C) was to treat such private companies to be public companies but that did not stop them from being 'private companies' who accepted....
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....rivate company (which becomes a public company by virtue of operation of Section 43A) once again reverting back to its status of a private company. 53. The reasons are obvious. Each one of the events stipulated under Section 43A sub-sections (1), (1A), (1B) and (1C) which have the effect of converting a public company into a private company is transient. For example, if we take a case falling under sub-section (1) of Section 43A, i.e. a private company becoming a public company by virtue of the fact that 25% of its shares are held by one or more bodies corporate; it is always possible that at some point of time such bodies corporate decide to disinvest either completely or partially (thereby reducing their holding to less than 25%) their shares of such private company. In such a case, the event or the condition which is essential to convert a private company into a public company under Section 43A (1) ceases to exist. Similarly, take the case falling under Section 43A(1B), i.e. a private company becoming a public company by virtue of the fact that such a private company holds not less than 25% of paid-up shares of a public company; If the private company (becoming a public compa....
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....he purpose of our analysis, they can be classified into two categories, (i) private companies which came into existence prior to the Amendment Act 53 of 2000 (w.e.f. 31.12.2000); and (ii) private companies which came into existence after the abovementioned date. 58. Insofar as the first of the abovementioned two categories is concerned they can further be categorized into (i) private companies which remained as such, and (ii) private companies which became public companies by virtue of operation of Section 43A. 59. Insofar as private companies which came into existence prior to 13.12.2000 and remained as such without falling into the net of Section 43A and private companies which came into existence after 13.12.2000, sub-section (11) of Section 43A would have no application. 60. The legal consequences emanating from insertion of subsection (11) in Section 43A only visit the second category mentioned above i.e. private companies which came into existence prior to 13.12.2000 but became public companies by virtue of operation of Section 43A. 61. Of them, we are only concerned with those private companies which became public companies by virtue of operation of Section 43A(1....
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.... Constitution and also on cumulative reading of the decisions of this Court in Damyanti Naranga v. The Union of India & Others, (1971) 1 SCC 678, Rustom Cavasjee Cooper v. Union of India, (1970) 1 SCC 248, Bennett Coleman & Co. & Others v. Union of India & Others, (1972) 2 SCC 788. The fundamental right to form an association implies the right to form the association on such terms and conditions agreed upon by its members, so long as such terms and conditions are not in conflict with any law or public policy. No doubt, the State can, by law, impose restrictions on such rights on the basis of the considerations mentioned in Article 19(4), but such restrictions must be reasonable. 64. The destruction of the collective rights of the members of the companies mentioned in para 62, in our view, would require, at the least, an express provision of law and such a provision must be a 'reasonable restriction' within the meaning of that expression occurring in Article 19(4). In the absence of any express provision which takes away the fundamental right of the shareholders of a private company, we are inclined to read a restriction on the collective right of the shareholders of a private co....
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....ay taking into account the accrued or acquired rights of the parties today. The law cannot say, 20 years ago the parties had no rights, therefore, the requirements of the Constitution will be satisfied if the law is dated back by 20 years. We are concerned with today's rights and not yesterday's. A legislature cannot legislate today with reference to a situation that obtained 20 years ago and ignore the march of events and the constitutional rights accrued in the course of the 20 years. That would be most arbitrary, unreasonable and a negation of history. ... Today's equals cannot be made unequal by saying that they were unequal 20 years ago and we will restore that position by making a law today and making it retrospective. Constitutional rights, constitutional obligations and constitutional consequences cannot be tampered with that way. A law which if made today would be plainly invalid as offending constitutional provisions in the context of the existing situation cannot become valid by being made retrospective. Past virtue (constitutional) cannot be made to wipe out present vice (constitutional) by making retrospective laws." 68. Apart from that, it is rightly pointed out by....
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.... amendment to Section 27(3). Whether such an omission is accidental or by a design is required to be examined? If it is by a design what is the purpose sought to be achieved of such a design requires an examination? 74. The Companies Act never prohibited the acceptance of deposits. Prior to the Amendment Act of 2000, there has never been a provision in the Companies Act which altogether prohibited companies either public or private from inviting or accepting deposits. Section 58A(1) "Section 58A. Deposits not to be invited without issuing an advertisement.-(1) The Central Government may, in consultation with the Reserve Bank of India, prescribe the limits up to which, the manner in which and the conditions subject to which deposits may be invited or accepted by a company either from the public or from its members." of the Act, (which was introduced by Act 41 of 1974) for the first time made a provision enabling the Central Government to prescribe "the limits up to which, the manner in which and the conditions subject to which deposits may be invited or accepted by a company either from the public or from its members". The remaining sub-sections of Section 58A make va....
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....nagement of public companies is subjected to under the Act is higher in degree compared to the regulations, control and supervision to which the management of a private companies is subjected to under the Act. The control contemplated under Section 43A(1C) is in addition to the regulations and supervision brought in by virtue of Section 58A. Before the amendment Act 53 of 2000: 79. If a private company chose to incorporate a stipulation not to accept deposits from PUBLIC, it is a matter of its internal policy. But if it incorporated such a stipulation and defaulted in compliance with such stipulation, the Company only ceased "to be entitled to the privileges and exemptions conferred on a private company by or under the Act" and the "Act shall apply to the company as if it were not a private company" - by virtue of the operation of Section 43 "Section 43. Consequences of default in complying with conditions constituting a company a private company.-Where the articles of a company include the provisions which, under clause (iii) of sub-section (1) of section 3, are required to be included in the articles of a company in order to constitute if a private company, but def....
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....sub-sections (1) to (1B) of Section 43A is now thought clearly not necessary by the Parliament. An inference obvious from Section 43A(11) whatever be the other implications of those sub-sections. 83. Even during the period when Section 43A operated, the Parliament never thought of curtailing the collective right of the members of the private companies to have restriction on the rights of individual shareholder to freely transfer shares. Therefore, to believe that such restriction is now sought to be imposed only in the case of those private companies in existence on 13.12.2000, which had earlier attracted Section 43A(1C), but not in the case of private companies, which earlier attracted sub-sections (1), (1A) and (1B), would be illogical. 84. The insertion of clause (d) in Section 3(1)(iii) is admittedly only prospective. Therefore, on and after 13.12.2000, if any body proposes to create a private company, the Articles of Association of such company must contain a clause prohibiting the invitation and acceptance of deposits from PUBLIC. 85. For all the abovementioned reasons, we are unable to agree with the submission of the respondents that by the Amendment Act 53 of 2000....
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....ndent company is not a public company and secondly in view of the judgment of the Bombay High Court dated 14.11.2008 in Company Petition No.77 of 1990 "to which the appellants herein were originally the parties but withdrew from the said company petition later" where the Bombay High Court held as follows: "Insofar as the present Petitioners are concerned as a matter of fact they are free to deal with the shares held by them. In that, the shares are now freely transferable. Indeed, when the Petition was presented at the relevant time, the Respondent No.1 Company was a Private Limited Company. As a result, there was restriction in the transfer of shares. However, it is common ground that now the Respondent No.1 Company has become a Public Limited Company as a result of Special Resolution moved in the Extra Ordinary General Meeting dated 5th May 2001 having been defeated. Having acquired the status of a Public Limited Company, the restriction on the right to transfer the shares which was applicable to Private Limited Company, would naturally get diluted. The appellants are precluded to argue that the first respondent Company is not a public company. 90. Both the submissions a....