Company Law Board
Smt. Sulochana Nathany vs Hindustan Malleables & Forgings Ltd. on 26 September, 2000
Equivalent citations: [2002]110COMPCAS874(CLB)
ORDER
Banerjl, Chairman
1. In this order we are considering the issue as to the right of a company to forfeit shares held in the name of certain trusts on the ground that entry of the names of trusts in the register of members is against the provisions of sections 153, 153B and 187C of the Companies Act, 1956 ('the Act').
2. The undisputed facts in this case are that the names of 3 trusts, namely, Motiram Hardeodas Charitable Trust, Hardeodas Agarwalla Trust and Ratan Devi Trust had been entered in the register of members of the company during the periods 1962 and 1971 and continued to be shown as members till 1992. During the period, the company not only allotted shares in the names of these trusts but had also allotted bonus shares and paid dividends in the name of these trusts. The lotal number of shares in respect of all these trusts is 57,500. The settler of all these trusts was one Late Arjun Agarwalla who expired in November, 1991. All these shares were forfeited by the company in a Board Meeting held on 16-5-1992 and these trusts were informed by a letter dated 29-6-1992. Challenging this forfeiture, the petitioners claiming themselves to be the trustees of these trusts have filed this petition seeking for rectification of the Register of members by inserting the names of the trustees in respect of the impugned shares.
3. The learned counsel appearing for the petitioners submitted as follows :
The settler of these trusts, viz., Arjun Agarwalla was one of the promoters of the company with the 2nd respondent. Thus two identifiable groups of shareholders, viz., Agarwalla Group and Jalan group promoted the company in 1955 with a shareholding in the proportion of 45:55. Shri Arjun Agarwalla expired in November 1991. During his life lime, late Arjun Agarwalla created three trusts Motiram Hardeodas Charitable Trust (MH Trust), Hardeodas Agarwalla Trust (HA Trust) and Ratan Devi Trust (RD Trust). MH Trust was created on 23-3-1971 and its name was entered in the Register of members of the company on 15-6-1971 in respect of 6,250 shares gifted by certain registered shareholders. Again on 16-9-1972, further 1,875 shares were transferred to this trust by the registered shareholders. On 29-6-1973, 8,125 shares were allotted to this trust by way of bonus shares. Thus, this trust was registered shareholder in respect of 16,250 shares. The HA Trust was created on 6-2-1958. On 2-1-1962, the company allotted 1,250 shares to this trust and its name was entered in the Register of members. From this date to 29-6-1973, this trust obtained further 35,000 shares by way of purchase, gift and bonus shares. In all, this trust held 36,250 shares. The RD Trust was created on 18-8-1965. The company aliotted 1,000 shares on 3-8-1966 and entered the name of this trust in the register of members. Later, 4,000 shares were allotted by way of bonus shares and thus this trust held 5,000 shares. All along dividends were paid to these trusts. Sometimes in 1983, with the view to rectify the position of the name of the trust being in the Register of members, a request was made to the company to transfer the shares held in the name of HA Trust to Shri Arjun Agarwalla in his capacity as a trustee (Annexurc A-5). However, the company did not take any action. Again in 1987, this trust made another request for transfer of 36,250 shares held in its name to one Citizen Service Society, a society registered under the Societies Registration Act, since the name of a registered society can be entered in the Register of Members. This was also not agreed to by the company. All of a sudden, these trusts received a letter dated 29-6-1992 from the company stating that the Board of directors of the company had forfeited the shares held in the name of these trusts in a board meeting held on 16-5-1992.
4. According to the learned counsel, the action of forfeiture is mala fide and not in accordance with the provisions of the Act or the articles. It was pointed out that the company was fully 'aware that the shares were held in the names of the trusts and that when the trusts wanted the shares to be transferred to the name of the trustee/a society, it refused the request. The learned counsel argued that the company has no powers to forfeit the shares and it could have only asked the trusts to nominate a trustee to hold the shares for the benefit of the trusts. Referring to the contention of the company that there are vacancies in the office of the trusts and as such the shares could not be transferred to the existing trustees, it was submitted he pointed out that a trust does not fail for want of trustees as decided in Mainul Mulk Matinujzzaman Khan v. H. Hunter AIR 1939 Oudh 161. The counsel also pointed out that the issue relating to the names of the trusts in the register of members had been going on for over 20 years but the company chose to forfeit the shares within a short lime after the demise of the settler of the trusts - Late Arjun Agarwalla. This itself, indicates that the act of forfeiture is mala fide to deprive the trusts of the benefits of the shares. Therefore, it was urged that the unilateral act of the company to have forfeited the shares is without sufficient cause and as such the register of members should be ordered to be rectified by entering the names of the petitioners, being the trustees of these trusts.
5. Shri P.C. Sen appearing for the respondents submitted that the action of the company in forfeiting the shares was in accordance with law in as much as shares cannot be held in the name of trusts as the same would be in violation of the provisions of section 153. He argued that in the absence of declaration in terms of sections 153B and 187C, the company was not aware of the recording of the trusts as the owners of the shares. When the Registrar of Companies asked the company in 1970 to enquire from the trusts as to whether the provisions of section 153B had been complied with, the company took up the matter with the trusts for rectifying the position by calling for various information and documents. Yet inspite of repeated reminders, the trusts failed to supply the information/documents till 1981. However, when late Arjun Agarwalla, in his capacity as the trustee applied for transfer of the shares to his name as a trustee in the year 1981 the company pointed out that the trusts had not complied with the requirements of the company as per its earlier letters and that the transfer instruments were defective and accordingly expressed its inability to register the transfers. Again in November 1983, two of the trusts applied for transfer of shares in favour of a society and the transfer instruments had been signed by late Arjun Agarwalla. The company expressed its inability to effect the registration of the transfers for various reasons - there was no evidence that late Arjun Agarwalla was authorised to sign the instruments and that without rectifying the register of members, no transfer could be effected. Accordingly, the trusts were advised to provide all necessary information/evidence for rectifying the register, but these trusts did not lake any action. He pointed out that as lale as in 1987, the trusls were advised to have the irregularity rectified but did not do so. Having left with no option and wilh the view to comply with provisions of section 153, the shares were forfeited with a unanimous resolution of the Board. Therefore, he submitted that an action to comply with law can never be termed as mala fide. In regard to the prayer of the petitioners to register the shares in the name of the first petitioner, he submitted that the same is not either legally permissible or warranted in facts of the case. He pointed out that, as per the directions of the Bench, the petitioners produced the trust deeds for inspection and that various defects were noticed during the inspection. While a photostat of the original deed of only MH Trust was produced in respect of other two trusts, only typed copy of purported deeds were produced. As per the deed of MH Trust, late Arjun Agarwalla and the 1st petitioner were the first trustees. It is stipulated in the deed that the quorum would be two trustees. After the demise of Arjun Agarwalla, there is only one trustee left and as such a single trustee cannot constitute a valid quorum to transact any business and, therefore, cannot have the shares transferred in her name as a trustee of the trust. In regard to RD Trust, the deed provides for 3 trustees. Of the three original trustees, only the 1st petitioner is alive. Even though it is claimed that the 2nd, 3rd and the 4th petitioners arc also its trustees, no documents have been placed as to when and how they were appointed as trustees and as regard to HA Trust, all the three original trustees are dead. The petitioners claim that the 1st petitioner is a trustee appointed as such by a deed of cancellation made by the late Arjun Agarwalla on 7-10-1989. The very fact that this deed of cancellation was executed to cancel an earlier one made on 5-10-1989, would show that there are some family disputes in the family of the petitioner and as such her appointment as a trustee is suspect. He submitted that the company has to ensure that it does not get into any avoidable legal disputes later and that is why it cannot register the shares in the names of the trustees.
6. Summing up his arguments, the learned counsel submitted that when the shares were acquired in the names of the trusts, the transactions were nothing but bcnami transactions. He further submitted that the shares were forfeited in May 1992, but the petitioners have moved the petition only in January 1995 and as such the petition is barred by limitation. Referring to S. Parameswari v. Kumadhenu Metal Rolling Mills (P.) Ltd. AIR 1971 Mad. 293, he pointed out that a company can take note of any trust otherwise than by entry in the register of members and once it does so, it can raise the issue of benami. Even otherwise, he submitted that as held in Dharwar Bank Ltd. v. Mahomed Hayat AIR 1931 Bom. 269 while a company cannot take notice of a trust, a Court can take note of the same while considering the rights of the parlies. According to him, section 48 of the Indian Trusts Act provides that where there are more than one trustee, all should join in executing the trust and in the instant case, as many vacancies are therein these trusts, the existing trustees cannot execute the trust. Likewise, he submitted that the shares have to be registered in the names of ail trustees. He prayed that in view of the various submissions made by him, the petition should be dismissed.
7. We have considered the pleadings and the arguments of the counsel It may be recorded that before the petitioners filed the instant petition, the company itself had filed a petition under section 111 of the Act seeking ratification of the forfeiture effected in the Board meeting held on 16-5-1992. Later, when the petition was sought to be withdrawn, the respondents therein, who arc the petitioners before us, now opposed the prayer for withdrawal or in the alternative desired to file the instant petition challenging the forfeiture. Accordingly the said petition was dismissed as withdrawn.
8. This petition has been filed under section 111(4) seeking rectification of the register of members of the company on the ground that the names of trusts had been omitted therefrom without sufficient cause. The reason adduced by the company for the omission is that the shares had been forfeited as the names of trusts cannot be entered in the members register in violation of the provisions of section 153 and further the trusts had not complied with the provisions of sections 153B and 187C. It is essential to record that there is no substantive provision in the Act dealing with forfeiture of shares. Only articles 29 to 35 of Table A deal with forfeiture. Therefore, in the absence of any substantive provision in the Act regarding forfeiture, a company has to derive such power only from the articles. Since forfeiture would result in appropriation of the property of a shareholder, strict compliance with the provisions of the articles is mandatory. In the instant case, articles 29 and 30 of the articles of association of the company empower the board of directors to forfeit shares. Exercise of such power, is, however, limited only in respect of failure of a shareholder to pay the call money within a prescribed period of time. Even in such cases, notice has to be issued to such a shareholder that the shares are liable to be forfeited in case he fails to pay the call money within a particular period of time. Other than this ground, the directors have not been empowered to forfeit the shares on any other ground. To constitute a valid forfeiture, the articles should give such powers to the directors, there should be proper notice to forfeit and power should be exercised following the procedure prescribed in the articles Bhagawandas Garg v. Canara Bank Ltd. [1981] 51 Comp. Cas. 38 (AP). Otherwise, the forfeiture would be invalid Karachi Oil Products Ltd v. Kumar Shree Narendra Singhji AIR 1950 Bom. 149. Since, in this case, the forfeiture has been effected on a ground not provided in the articles, such forfeiture has no validity. Further, we also note that no advance notice to the trusts had been given before forfeiture. No doubt the company has been asking the trusts to rectify the position right from 1970, yet in none of the letters relied on by the company in its reply, there is any mention about forfeiture. All the letters mention only about rectification of the register of members on receipt of certain information called for by the company from the trusts. It is not that the company was not aware that it had no power to forfeit on the ground that the names of the trusts cannot be entered in the register of members, as is evident from the letter dated 25-1-1984, wherein the company had advised the trusts that the company might have to move a competent court of law under section 155 of the Act for rectification, in case the trusts did not cooperate. Further we also note that the trusts attempted to rectify the position, first asking the company to register the shares in the name or a trustee, late Arjun Agarwal and again in the name of Citizen Service Society. On both the occasions, the company questioned the autho'rity of late Arjun Agarwalla to sign the transfer deeds as a trustee. This stand of the company, according to us is untenable. It is on record that all these trusts were allotted shares by the company, registration of transfers in the names of these trusts had been approved by the company. At these points of time the company never questioned the authority of the trustee acting on behalf of the trusts, but when the very same trustee desired to rectify the situation, that too, at the insistence of the company, the company had refused to do the needful. It is well settled that in exercise of powers of forfeiture, the directors are acting in a fiduciary capacity and their action should be bona fide and in the interest of the company. In the instant case, no doubt there was a statutory requirement to rectify the register of members to comply with the requirements of section 153, but the manner in which it has been done, does not appear to be bona fide notwithstanding that the company has no powers of forfeiture except to the extent provided in the articles. It is to the knowledge of the company that Arjun Agarwalla who had been corresponding with the company on behalf of the trusts died in November 1991, and, therefore, the matter should have been taken up with the trusts before deciding on the forfeiture. It is record that the entry of the names of the trusts as shareholders was found to be not in accordance with law as early as in 1970 and the company did not take any action during the life time of late Arjun Agarwalla, but within a short time after his demise, without notice to the trusts, forfeited the shares. No doubt that the company had to take some remedial steps to rectify the register of members to comply with the requirements of section 153, but it is not that other than forfeiture there was no other option. The right course of action that the company should have adopted, as it itself had indicated its letter to the trusts dated 21-5-1984 that it should have approached the CLB for appropriate directions. It may be mentioned that the CLB in another case where the register of members of a company contained the names of a number of partnership firms, and when the ROC issued a notice of prosecution under section 150, the company approached the CLB for appropriate directions for rectification of register of members by removing the names of the firms. Since it was found that the whereabouts of the firms/partners of these firms were not known and that even the dividends declared on the shares held by these firms could not be disbursed due to this fact, the CLB ordered the company to form a trust to hold these shares for the benefit of the firms and record the names of the trustees in the register of members in place of the firms. It did not direct the forfeiture of the shares. In Amrit Banaspali Co. Ltd., In re [1995] 83 Comp. Cas. 789/ [1984] 2 SCL 110 (CLB). Therefore, in the instant case, the forfeiture has to be declared invalid not only on the ground that the company had no power to forfeit the shares but also on the ground that the same is not bona fide.
9. The result of our declaration that the forfeiture is invalid is that the names of the trusts would have to be restored in the register of members. But the same would be in contravention to the provisions of section 153. The law docs not prohibit a trust from acquiring shares of a company. Section 153 only lays down that a company should not enter in the register of members any notice of trust. Therefore, whenever a trust acquires shares, the same are registered in the names of its trustees and these trustees will have to comply with the provisions of section 153B (where applicable) and section 187C. The petitioners themselves have sought for such a prayer that the shares be registered in the names of the trustees of these trusts.
10. The respondents have raised many objections in the shares being registered in the names of the trustees. They have questioned the authenticity of the existence of the trusts, the locus standi of the pelitioners to challenge the forfeiture, their claim to be the trustees, etc. The learned counsel for the company also relied on certain case law to state that even if the company were not to take noiice of the trust, the CLB can take note of the same and consider the objections of the respondents in relation to the trusts. We are of the view that it is too late in the day to question the authenticity of the existence of the trusts after having dealt with them over a period of two decades. Further, we also note that the petitioners have furnished enough materials, like copies of the trusts deeds, income-tax assessment orders, bank pass book, etc., which all indicate the existence of the trusts. As a matter of fact we find that even though the matter regarding the trusts names in the register of members was taken up in the year 1970, the company had issued bonus shares to all the three trusts in 1973 and had been paying the dividend to these trusts all along. Therefore, it is not open to the company to question the existence of the trusts. In regard to the locus standi of the petitioners, the contentions of the respondents are many fold. The petitioners claim to be the trustees of the trusts whose shares had been forfeited and as such they are 'persons aggrieved' in terms of section 111(4). However, the respondents contest the same on various grounds as elaborated as a part of the arguments of their counsel. We find that Smt. Sulochana Nathany, the first petitioner has been named as a trustee in the trust deeds of Motiram Hardeodas Charitable Trust and Ratan Devi Trust. In respect of Hardeodas Agarwalla Trust, she was appointed as a trustee on 17-10-1989 by way of a supplemental deed executed by late Arjun Agarwalla. Thus she is common trustee in all the three trusts. Third and fourth petitioners are reportedly the trustee of Ralan Dcvi Trust (the 2nd petitioner reportedly a trustee in all these trust expired during the pendency of the proceedings). The company refuses lo acknowledge their being the trustees as the petitioners have not disclosed as to how and when they were appointed as trustees. Coupled with this objection, the company has also raised the objection that the number of trustees in these trusts are below the minimum prescribed in the trust deeds and the number of existing trustees is below the quorum fixed. The learned counsel for the company relied on section 48 of the Indian Trust Act to state that co-trustees cannot act singly. It is so when there are more than one trustees are in position. In cases where there are vacancies in the office of the trustees, such a situation is covered by section 76 of the same Act which reads "Survival of trust : On the death or discharge of one or several co-trustees, the trust survives and the trust property passes to the others unless the instrument of trust expressly declares otherwise". [Emphasis supplied]. This section has been interpreted by the Calcutta High Court in Smt. Jurat KumariDasi v. Shaligram Subhkaran Khemani AIR 1960 Cal. 489 by staling that a provision for appointment of new trustees in place of dying or retiring would not be construed as displacing the rule of survivorship and though new trustees may be appointed under the provision, it does not preclude the continuing trustees to function til! such appointment and the new trustees join in the execution of the office. Thus, the legal position is that a trust survives the vacancy of trustees and that the continuing trustees can execute the trust. Therefore, once it is established that the first petitioner is a common trustee in all these trusts, she has full authority along with other existing trustees to execute the trust notwithstanding vacancies of trustees. In view of this, the objection of the company that the stipulated number of trustees are not in position in these trusts does not survive.
11. Thus, we hold that the action of the company to forfeit is invalid and that various objections raised by the company in relation to the trusts are not sustainable. Accordingly we direct the company to restore the names of the trusts in the register of members in respect of the impugned shares immediately. Within a period of one month from the date of this order, the trusts should seek transfer of these shares in the names of all the existing trustees through a resolution of the trustees. The first petitioner being the common trustee in all the trusts will have the authority to sign the transfer forms on behalf of the trusts and lodge the transfer documents along with the share certificates together with copies of the resolutions of the trustees. Since she is the only trustee in one of the trust, her request in writing for transfer will be deemed to be the resolution of the trustees. The company will register the transfer of the shares in the names of all ihc trustees in position as per the transfer deeds within one month of lodgment. On registration of the shares in the names of the trustees, they will comply with the provisions of section 153B if applicable and section 187C.
12. With the above directions, the petition is disposed of. No order as to cost.