TaxTMI 
TaxTMI 
TaxTMI 
2006 (6) TMI 523
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....ed shares to his own name as Executor to the Estate of PDB. By a letter dated 12.7.2004, the 6th respondent, one of the directors of the company, returned the share certificates to RSL asking him to submit an attested copy of the will and also an indemnity in the prescribed form to enable the company to proceed further in the matter. On 14.7.2004, RSL submitted the aforesaid documents. In a Board meeting on 15.7.2004, two directors viz., the 41'1 and 6th respondents, present in that meeting unanimously passed a resolution approving the transmission. The petitioners being the sisters of late M.P. Birla (MPB), the husband of PDB, claiming to be her legal heirs in intestacy, have challenged the transmission on various grounds and have sought for rectification of the register of members. The respondents have while questioning the locus standi of the petitioners, have also contended that two suits on similar grounds are pending in Calcutta High Court, in which some interim orders have also been passed, to avoid conflict of decisions, this matter should be deferred. 3. Before I record the arguments of the counsel, it is necessary to reproduce the relevant Article of the Articles of ....
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....ceived from Shri Rajendra Singh Lodha, Executor, Estate of Smt. Priyamvada Birla (deceased), inter-alia informing that Smt. Birla died on 3.7.2004 and that by her last Will and Testament dated 18.4.1999, she appointed Shri Rajendra Singh Lodha as (he Sole Executor to her Estate and requesting the company to transmit 33715 shares of the company held by her to the name of "Rajendra Singh Lodha, Executor, Estate of Priyamvada Birla(deceased)". Copies of the death certificate and registered Will of Smt. Priyamvada Dirla as well as Indemnity Bond dated 14.7.2004 by Shri Rajendra Singh Lodha were also placed on table. The Chairman also placed on table legal opinions received by the company, according to which the Board of Directors can dispense with the production of Probate or Letters of Administration or Succession Certificate for the purpose of transmitting shares held by a deceased shareholder in favour of (He Executor, He also stated that in the past on 17.9.1990, the Board had also allowed transmission of 1500 shares of the company in favour of Smt, Priyamvada Birla on the death of Shri M.P. Birla without production of any Letter of Administration, Probate or Succession ....
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....he afternoon of 12.7.2004, the Will was read out to the family members. There was a wide coverage in the newspapers on 13th, 14th and 15th July, 2004 regarding challenge to the purported Will, report on contest of the Will and lodging of cavcat (copies of press reports annexed at pages 69 to 83 of the rejoinder to R-2 reply). Thus the fact that the Will was being disputed was in the public domain. On 14th July, 2004, the advocates of the petitioners wrote to RSL questioning the validity, correctness and legality of the purported Will. On the same day, RSL reportedly sent a copy of the purported Will and indemnity bond to the company, 15th July, 2004 was the duty on which Shradh Ceremony of late PDB was performed. It is inconceivable that on the day of the Shradh, the Board of the company met and passed the resolution allowing the transmission in favour of RSL dispensing with the production of probate or letter of administration or succession certificate. The sequence of events would show that all the documents have been fabricated with pro dates. This presumption has to be drawn as the transmission was never disclosed till December, 2004 in any of the other proceeding. 6. In the p....
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.... certificate, stipulating clearly that no one else could be recognized. Administrators arc appointed only by Courts and succession certificates are also granted only by Courts. Therefore, the word "executor" in the first sentence of Article 47 should be construed as the one who has obtained probate and till such time he obtains probate, he could not be recognized as the executor. In terms of Section 213 of Indian Successions Act, no right as executor or legatee can be established unless a competent court has granted probate Khaje Abibudla v. Ananga ILR 1942 (2) Cat, 363; Meyappa v. Nabana AIR 1916 PC 202; Basanta v. Gopal ATCWN W 136. In Clarclcc Pis v. Union of India , dealing with Section 213 of Succession Act, the Supreme Court has observed that this section is a bar to everyone claiming under a Will whether he is plaintiff or defendant if no probate or letters of administration arc granted. Thus, it is evidently clear that the company could not have acceded to the request of RSL to enter his name in the register without a probate. 8. It was further submitted: The word "may" appearing in the second part of Article 47 has to be construed as "shall" ....
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....is request for entry of his name in the register of members. 10. Even the assumption of the directors that they had absolute discretion to dispense with probate is erroneous. In Shree Krishna Agency Ltd. v. CIT , it is held that even if absolute discretion is given to the directors, it does not confer any uncontrolled or unrestricted discretion. They cannot act arbitrarily or capriciously, Likewise, in Bajaj Auto v. N.K. Firodia , the Supreme Court has held that when the directors have absolute and uncontrolled discretion to decline registration of transfer of shares, such discretion should be exercised bonafide, in the interest of the company/shareholders and not arbitrarily or for a collateral purpose. In the present case, the directors have exercised powers which they did not possess and have approved the transmission on wrong principle malafide, for an oblique purpose and with an ulterior motive to allow RSL to grab the company. 11. Arguing further, the learned Counsel submitted: The haste with which RSL had tried to grab control of the shares of the deceased within less than 5 days of her demise would indicate his malafide intention. Even before the Will was read out to the ....
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....e Board has misused its discretion knowing fully well that the Will was under challenge. 13. Dealing with the locus standi of the petitioners, the learned Counsel submitted: The petitioners arc the sisters of MP Birla. Since he had no issue, on demise of both MPB and PDB, the petitioners would be the only persons to succeed to the estate of both the deceased in terms of Hindu Successions Act, 1956, Schedule (Class II). In the probate proceedings before Calcutta High Court, the court has recognized the petitioners as heirs on intestacy. Even RSL has admitted the right of the petitioners in the probate proceedings. If the Will of 1999 is held as invalid, the petitioners would inherit the entire estate of PDB. RSL has challenged mutual Wills of 1982. If the mutual Wills were held to be valid, RSL would have no right on the estates and if all the three Wills were to be declared invalid, then the petitioners would inherit the estate both MPB and PDB. Since the right of the petitioners to the estate of the deceased is contingent, they have not applied for entering their names in the register of members consequent upon the rectification of the register as sought for. It is not necessary ....
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....continue to remain in the name of PDB who is no more. 16. Dealing with merits, Shri Mitra submitted: To impugn the exercise of discretionary powers vested in the directors, the petitioners have to establish that the directors had acted against the interest of the company that they had acted on a wrong principle and that they had acted with an oblique motive or for a collateral purpose (Bajaj Auto case-Supra). RSL in whose favour the shares have been transmitted has been associated with several MP Birla Group companies as Chairman/Director for a very long time and he has always been acting in the interests of not only MP Birla Group of companies but in the interest of PDB also. She had absolute trust and confidence in him and had always consulted him in all matters relating to the group companies, trusts and charitable institutions. The very fact that RSL has been closely associated with MP Birla Group companies and also a close associate of PDB, itself was a good ground to exercise the discretion of the directors to accede to his request for transmission without probate. The 4th respondent who was present in the meeting on 15th July, 2004 had actually witnessed the execution of th....
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....Act, the company could not have recognized RSL as the executor without probate. The bar in Section 213 is only with reference to establishing the right of a person as an executor in a court of law. In terms of Section 211(1), the executor of a deceased person is his legal representative for nil purposes and the property of the deceased person vests in him as such and in terms of Section 307, he has the power to dispose of the properly either wholly or in part. In Akshay Kumar Paul v. Nandlal Das ILR 1946 (1) Cal, 432, it has been held that an executor of a Will need not take out probate before acting us such so long as he does not have to establish his right in a court of justice for which he will have to produce probate. In view of the provisions of Section 211 of the Act, the properly vests in the executor immediately upon the testator's death and the grant of probate only makes his title certain Raja Kakarlapudi v. Andhra Bank Ltd. . Under Section 211 and Section 307 of the Indian Succession Act, an executor derives his title by virtue of the Will and not from the date when the Will is probated. He represents the estate even before the grunt of probate and he can act as the ....
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....Court affirming their signatures on the Will would vindicate the bonafide action of the directors. When the directors had taken a decision on the basis of valid documents as permitted by Article 47, no further enquiry needs to be made by this Board whether the directors had acted bonafide or malafide. In so fur us the factum of holding the Board meeting is concerned, no director has complained that he did not receive notice for the meeting, In Page 9 of the reply, the respondent directors have explained the entire sequence which has not been disputed in paragraph 'p' of the rejoinder. When the directors have exercised their discretion, the onus is on the petitioners to prove that the directors had acted wrongly. In Harinagar Sugar Mills Ltd. v. Shyam Sunder Jhunjhunwala , the Supreme Court has held (para 20) that rectification can be granted only if the transferor establishes that the directors had, in refusing to register the shares in the name of transferee, acted oppressively, capriciously, or corruptly or in some way malafide and not in the interest of the company. It has also held that such a plea has to be expressly raised and affirmatively proved by evidence. In the ....
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....substitution and accordingly adding them as petitioners 3 to 6. 22. The respondents have raised a preliminary objection on the maintainability of the petition on the ground that the petitioners have no locus standi. This petition has been filed under Section 111(4) of the Companies Act, 1956 which reads:. (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 there from; or (b) default is made, or unnecessary delay takes place, in entering in the register the fact of any person having become or ceased to be a member including a refusal under Sub-Section (1). the person aggrieved or any member of the company or the company, may apply to the Company Law Board for rectification of the register. 23. From this Section, it is evident that the right to apply under Section 111(4) of the Act has been vested in a member or any person aggrieved. Admittedly, in the present case, the petitioners arc not members and they have filed this petition as aggrieved persons. The contention of the respondents is that since these petitioners have no personal....
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....der Section 155 of the Act for rectification of the register of members of the company seeking for removal of the names of those in whose favour the shares stood registered. She had not asked for entry of her name instead. On her locus standi being challenged on the ground that she had not sought for entry of her name in the Register of Members, the Supreme Court held that since her title to the shares was under dispute, she could not have prayed for entry on her name in the Register and that the petitioner could maintain an application under Section 155 for cancellation of transfer of the disputed shares to the other parties concerned and rectification of register by removal of said other parties' names there from, while, reserving her right to take action to have the disputed shares transferred in her own name. The ratio that emerges from these decisions, is that to maintain a petition under Section 111(4) of the Act, neither an aggrieved person nor a member needs to show any personal interest in the shares nor that they should seek entry of their names in the register of members consequent to the rectification sought for. It is an admitted position that even though the petit....
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.... order 2005 2 WBLR (Cal) 311), the High Court has directed " I therefore direct RSL to maintain the status quo with regard to the transfer of shares received and/or got hold of already in respect of (he companies from the deceased lady. This order of status quo will also cover any other shareholding in respect of other company which might be coming to his hands. This order shall cover other movable properties also". In paragraph 34, the learned judge has observed "It is also an admitted position that RSL has already got his name registered as the transferee qua executor of the Will yet to be probated in the company's register and then he has consolidated his position. If proceeding has been initiated before the Company Law Board alleging mismanagement, I should not make any observation in (his regard. The forum concerned will obviously decide the matter". From the directions and the observation, it is evident that the High Court was aware of the present proceeding before this Board and it has only directed RSL to maintain the status quo with regard to the shares to ensure that by his voluntary act, no change is effected. No fetters appear to have been plac....
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....of obtaining of probate etc. Such a construction of the Article is too legalistic. I would, therefore, examine the matter on the basis of the understanding of the Directors of the provisions of Article 47. It was argued at the bar by the counsel for the respondents that "executor" in the first line of the Article 47 is "executor simpliciter" and not one who has obtained probate. Such an understanding in not found in the Board resolution. A reference to the application prescribed by the company for seeking transmission would clearly indicate the understanding of the Board/Company. (I am assuming that the application has been prescribed by the company, as, when it was so pointed out by the counsel for the petitioners, there was not rebuttal). The heading of the application filed by PDB at the time of seeking transmission of the shares of MPB reads "Form to be completed and executed by the Survivor(s) or legal heirs or successors(s) holding succession certificate, probate of will or any other legal documents of the deceased shareholder". This would make it clear that the understanding of the Board/company is that only a person having probate of Will could....
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....nothing has been produced to substantiate the same. One aspect that is abundantly clear is, that even if the Board meeting had been scheduled earlier, the matter of transmission could not have been included in the agenda as RSL sent the indemnity only on 14.7.2004 and the meeting was held on 15.7.2004. The absence of any satisfactory explanations to the issues raised by the petitioners on the factum of the meeting on 15.7.2004, might be a persuasive factor to agree with the petitioners, but I propose to examine the transmission on the basis that the meeting on 15.7.2004 was actually held and the decision to transmit was actually taken that day. 27. Both the sides have relied on various judgments on the exercise of discretionary powers, more particularly that of the Supreme Court in Bajaj Auto case wherein the court has laid down certain tests to examine whether discretionary powers vested in the Board of directors have been exercised properly or not. In that case, the court examined a case of refusal to register transfer of shares i.e. discretion exercised in a negative manner. In the present case, the positive action of the Board in exercise of its discretionary powers is under c....
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....t of the application from RSL dated 9th July, 2004, it is the 6th respondent, signing as a director of the company, asked for an indemnity bond in the format enclosed with the letter dated 12th July, 2004. Seeking of indemnity bond would arise, in terms of Article 47, only when the Board decides to dispense with probate. In other words, dispensing with probate is the prerequisite to call for indemnity etc. It is on record that RSL, did not seek for dispensation with production of probate in his letter dated 9th July, 2004, There is nothing on record to show that the letter of RSL was placed before the Board, When RSL himself had not sought for dispensation with probate, there was no need to have obtained legal opinions. In terms of the Article, as been understood by the directors, that in the normal course, probate was necessary and when RSL had applied for transmission, he should have been asked to produce probate drawing his attention to the provisions of the Article and in case, in response, he seeks dispensation with the same on the grounds of hardship and the like, the Board could have cither acceded to his request requiring him to produce the same within a set time frame or t....
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....esolution. All these would indicate that the directors had no doubt about her entitlement to the shares of MPD, Compared to the case of PDB, in the present case, RSL is not in any way related to PDB; indemnity was called for; legal opinion was obtained; only two directors approved in a meeting even though a 3rd uninterested director was on the Board (he had been given leave of absence). If the 4th and the 6th respondents had really believed that they could rely on the past precedence, they should have approved the transmission without asking for indemnity or legal opinion, as was done in the case of PDB, The very fact that legal opinion was obtained and indemnity was called for would indicate that, the directors were not sure of the entitlement of RSL, in spite of the Will, unlike in the case of PDB. Thus it is abundantly clear that both the cases are not similar and by relying on the precedence, the directors have acted on wrong principle. 33. As far as legal opinions arc concerned, neither the case sheet seeking for opinion nor the opinions expressed has/have been disclosed, in spite of the repeated mention to that effect by the counsel for the petitioners. If they had been prod....
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....is Board had directed the company to register transmission without probate. In that case, knowing fully well that the petitioner was the legal heir, the Board of the company declined to register transmission on the ground that the value of the shares was high and as such probate should be obtained. Since the said stand of the Board was found to be unjustified, it was directed to transmit the shares without probate. Thus, the decision in that case has no application to the present case. 35. Now, the manner and the circumstances in which the decision to dispense with probate was taken on 15.7.2004. Shri Mitra forcefully contended that prompt and expeditious action by the directors cannot be construed as an act with malafide intention and as a matter of fact, it was contented that if the decision had been delayed, such a delay could have been construed to be with malafide intention. This argument could be valid if the decision had been taken on correct principle and bonafide. The expeditious decision in the case of PDB has not been questioned as it was taken honestly and on correct principle as her entitlement was not in dispute. However, from the narration below it would be evident ....
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....ws report. Their contention that news paper reports cannot not be relied was on the basis that the petitioners had enclosed only one such report in the dated 15.7.2004 in the petition and all others were subsequent to that dale, However, when now it is evident from the rejoinder that so many newspapers had carried the news, that too on two consecutive clays, it is difficult even to presume that the directors were not aware of the news reports that the Will, even if not already challenged, was likely to be challenged. Likewise, when so many papers have carried the news of challenge to the Will, the 4th and 6th respondents cannot say that news paper reports cannot be relied on. When discretionary powers are vested in the Board, that too absolute discretionary powers, the Directors have to exercise the same cautiously. 36. At this juncture, it is necessary examine as to why the Article stipulates production of probate. While in terms of Section 211 of the Succession Act, the property vests in the executor immediately on the death of the testator, the title of the executor becomes certain only on obtaining probate. This is what has been held by the courts in the cases cited by the cou....
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....th Articles. His absence from the Board meeting is of no consequence. Considering the fact, that all the parties involved in the transmission, RSL, 4th and 6th respondents were/are closely associated with each other as admitted by themselves, the inescapable conclusion that one could arrive at, is that, they had acted in concert to get the impugned shares transmitted in favour of RSL without production of probate by malafidely exercising the Board's discretionary powers. During the hearing, I specifically asked Shri Mitra, counsel for the company, as to the need for transmission, when according to him, in terms of Section 211, the estate had vested in RSL. He answered (as recorded by me in my notes) "Acting promptly does not mean malafide. I needed voting rights to protect the investment of the Estate us the company holds substantial shares in other Birla Companies". This oblique purpose has been facilitated by the 4th and the 6th respondents. 37. The counsel for the respondents contented that without particulars, the petitioners cannot allege malafide, collusion or fraud etc. On this contention, I would like to refer to the decision of Madras High Court in Shoe Spec....
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....test the present case in the opinion of a fair and sensible person, it would be quite evident that on 15.7.2004, when there were widespread news of challenge to the Will, the decision to approve transmission without probate could not have been taken. Even though the petitioners have not placed any material to allege fraud, collusion etc, the facts and circumstance of this case would clearly lead only to that conclusion. Seeking for indemnity bond and legal opinion by a single director without the approval of the Board in violation of Article 47, holding a Board meeting on the day of Shradh, RSL sending the indemnity bond on the same day when he had filed a caveat in the court, the Board approving the transmission after the challenge to the Will came into the public domain, wrongly relying on precedence etc arc circumstantial evidences, which necessarily lead to the only conclusion that the entire episode is nothing but a fraud, perpetrated for an oblique and ulterior purpose ie., to allow RSL to exercise voting rights on the shares. 39. It was argued that the shares were not transmitted in the personal name of RSL but only in his capacity as the Executor of the Will of PDB. It is ....