TaxTMI 
TaxTMI 
2026 (5) TMI 281
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....resent appeals arise from the judgments of the High Court [Vide judgement dated 08.06.2009 in Company Appeal No. 7 of 2004 and judgement dated 21.04.2010 in Company Appeal No. 9 of 2008.], whereby the appeals preferred by the appellants against the orders of the Company Law Board [Vide order dated 02.12.2004 in Company Petition No. 9 of 2001 and order dated 14.03.2008 in Company Petition No. 1 of 2005.] came to be dismissed. The principal question which arises for consideration in these appeals is whether, in the absence of a formal entry of the respondent no. 1's name in the register of members, he could nonetheless be regarded as a "member" of the company so as to invoke the jurisdiction of the Company Law Board under Sections 397 and 398 of the Companies Act, 1956. The facts necessary for the adjudication of the present controversy are set out hereunder. 2. Appellant no. 1 is a company incorporated on 14.11.1994. Appellants no. 3 and 4 are its shareholders and directors. Appellant no. 2, along with his wife, established and constructed a hospital intended to be operated by appellant no. 1. The hospital commenced its operations but, within a short span, encountered financial c....
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....responding to respondent no. 1's investment or, in the alternative, to refund the invested amount together with interest. Aggrieved by the treatment of respondent no. 1 as a member, the appellants preferred an appeal on 13.12.2004. At this stage, it may be noted, without disturbing the chronological narration, that the said appeal came to be dismissed by the High Court vide the impugned judgment dated 08.06.2009, wherein the preliminary objection raised by the appellants regarding maintainability was rejected. The reasoning adopted by the High Court will be adverted to at a later stage, after setting out the relevant facts pertaining to the connected proceedings. 7. The second tranche of proceedings arose from a meeting of the Board of Directors held on 25.12.2004, wherein the Board of the appellant company allotted 14,75,998 shares to respondent no. 1 and also allotted shares to appellants nos. 2, 5, 6 and 7 against their earlier investments. On the same day, appellant no. 2 was further allotted 60,00,000 shares as consideration for the transfer of the land and building in which the hospital was functioning, such transfer being a pre-condition for execution of a Management Agre....
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....n 16.07.2010, it was directed to be listed along with the main appeal. Subsequently, by order dated 02.08.2010, this Court directed the appellants to deposit Rs. 2,59,18,525/- which included interest at the rate of 6% up to 01.08.2009. 10. By order dated 18.10.2010, this Court admitted both the petitions and they have now surfaced before us for final hearing. 11. We have heard Mr. Shyam Mehta, learned senior counsel appearing on behalf of the appellants, and Mr. Shailesh Mandiyal and Mrs. Haripriya Gopal Shankar, learned senior counsels appearing on behalf of the respondent no. 1. A. Submissions on behalf of the appellants: 12. Mr. Shyam Mehta, learned senior counsel, argued with sobriety and persuasion. He has confined his submission to a neat question of law relating to the scope and ambit of the expression 'member' appearing in Sections 397 and 398 of the Act, 1956, and even we have confined our enquiry to that extent. Hence, the principal controversy in the present case revolves around whether respondent no. 1 could claim the status and entitlements of a member without fulfilling the statutory requirements prescribed under the Act, 1956, particularly Section 41 ther....
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....): 13. Per contra, learned senior counsels appearing on behalf of respondent no. 1 supported the reasoning adopted by the Company Law Board as affirmed by the High Court. 13.1 Entry of a person's name in the register of members is a statutory obligation cast upon the company, which the appellant company had failed to discharge despite receiving substantial investment from respondent no. 1 and repeated requests made by him for allotment of shares. 13.2 Appellants could not be permitted to take advantage of their own failure to comply with statutory requirements by relying upon a hyper-technical interpretation of the expression "member". 13.3 Respondent no. 1 had invested substantial amounts in the company and such investment had been accepted and utilised by the company in its business operations. In these circumstances, it was urged that the company could not deny respondent no. 1's entitlement to membership merely on account of its own omission to complete the formal entry in the register of members. 13.4 Accordingly, it was submitted that the findings recorded by the Company Law Board and affirmed by the High Court were justified both on facts and on law, and that ....
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....he affairs of the company. 15. On the basis of the above factual background, the High Court placed reliance on the judgement in Shri Balaji Textile (supra) to state that the meaning of the word "member" under Sections 397 and 398 is to be understood in light of definition in Section 2(27) and not with reference to Section 41. Explaining the scope of Section 41, it was held that this provision needs to be restricted to fact situations that necessitated its introduction, that is, to protect interest of a company from a busy body claiming to be a subsequent purchaser of shares as well as to protect shareholders/persons from false claims of unscrupulous companies. In all other cases, the broader definition in Section 2(27) would apply. In view of the above position of law, it was held that a person becomes a shareholder of the company either by his name being entered in the register of members or by him being treated as a member, as evidenced by subsequent conduct. 16. To support its conclusion that respondent no. 1 is to be treated as a member of the appellant company, the High Court placed reliance on Buckley on Companies Acts, 2000 edition, wherein it is stated that allotment ....
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....ly in accordance with Section 41 of the Act, 1956, or whether it must be understood in the broader sense contemplated under Section 2(27). It would also be necessary to consider whether Parliament intended that membership of a company could arise only upon entry in the register of members, or whether the Act contemplates other legally recognised modes by which membership may be established, including deemed membership, proof of agreement to become a member, and recognition of proprietary interest evidenced through conduct. It is in this backdrop that the legal position governing the meaning and scope of the expression "member", as occurring in Sections 397, 398 and 399 of the Act, must now be analysed before applying the same to the facts of the present case. 21. The statutory framework under the Act, 1956 draws a clear distinction between the inclusive definition of the term "member" contained in Section 2(27) and the provisions governing acquisition of membership set out in Section 41. Section 2(27) employs language of wide amplitude and, in relation to a company, embraces every category of member, subject only to the limited exclusion of a bearer of a share-warrant issued und....
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....ry to settled principles of interpretation to attribute to the Legislature an intention to create conflicting meanings of the same expression within the statute. The expression "member", when employed in the context of remedies under Sections 397 and 398, must therefore be construed with reference to the wider definitional framework provided in Section 2(27) and allied provisions governing the rights of members. 24. The Karnataka High Court in Shri Balaji Textile (supra) adopting a similar construct by analysing Sections 2(27) and 41 observed that while Section 2(27) defines the expression "member" in comprehensive terms, Section 41 merely lays down the procedural requirements governing acquisition of membership. It was further held that the meaning of the word "member" occurring in Sections 397 and 398 must be understood in the context of those provisions and cannot be rigidly controlled by the procedural requirements contained in Section 41(2). The Court emphasised that the legislative amendment introducing the words "in writing" in Section 41(2) was intended to remedy a specific mischief, namely, the insertion of names in the register of members without consent, particularly ....
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.... and are utilised for the company's business purposes, such conduct constitutes strong evidence of recognition of the investor's proprietary stake. It has been relevantly held as follows - "22. It seems to me in light of the authorities cited above that the interpretation to be placed on section 41(2) vis-a-vis petitions filed seeking relief from oppression and mismanagement should be governed not strictly by the requirements of the sub-section, so long as in substance and effect the person complaining of acts of oppression and mismanagement has been recognised or treated as shareholder/member by the conduct of the company, and that in giving effect to the remedies against the grievance, considerations of equity and justice should be allowed to prevail." 29. Having carefully examined the record, relevant statutory provisions, competing submissions, judicial pronouncements and the reasoning adopted by the High Court, this Court finds that the conclusion treating respondent no. 1 as a member was founded upon a consistent and cumulative chain of factual circumstances demonstrating recognition of his proprietary interest in the appellant company. The High Court placed relia....