Company Law Board
Master Gautam R. Padival (Minor) vs Karnataka Theatres Limited on 16 December, 1999
Equivalent citations: [2000]100COMPCAS124(CLB)
ORDER
S. Balasubramanian, Vice-Chairman
1. A short, but important question that has arisen in this petition for determination, is, whether the name of a minor who has obtained shares by transfer, could be entered in the register of members of a company or not.
2. The facts leading to this question are : the father of the petitioner purchased two shares of the company and lodged the same along with the transfer instrument to the company for registration of transfer in the names of Master Gautam R. Padival (minor) represented by father and natural guardian M. Ratnavarma Padival, jointly with Aruna Padival (mother). The board of directors of the company refused to register the shares as sought for on the ground that one Madhava Rao, advocate had given a legal opinion against the registration. Along with the letter of refusal, the opinion given by Madhava Rao was also enclosed. According to his opinion, since Section 41 of the Companies Act, 1956, stipulates that every person desiring to become a member has to agree in writing and since a minor is not capable of entering into such an agreement, the shares cannot be registered in the name of the minor. The opinion further indicated that in view of the provisions of Section 153, the company could not take notice of the guardian holding shares in trust for a minor. This stand of the company has given rise to this petition.
3. Seshadri, advocate appearing for the petitioner contended that in regard to transfer of shares, the company is bound by its articles. As per Section 82 of the Act, shares are movable property transferable in a manner provided by the articles. The company has adopted the provisions of table "A" and there is nothing in table "A" to prohibit a minor from becoming a member of the company. He submitted that, legally a minor can hold properties in his name and as matter of fact, in the present case, the petitioner is an income-tax assessee. It is always not necessary, that to become the member, one has to agree in writing, as shares could be gifted or it could be transmitted or could be transferred. In case of transmission of shares, by operation of law, merely by just sending an intimation of transmission to the company, the legal heirs, including a minor could seek entry in the register of members. Further he submitted that the company is a public company and, therefore, is governed by the provisions of Section 111A which makes it abundantly clear that shares in a public company are freely transferable. He placed reliance on the decisions in R. Balaraman v. Buckingham and Carnatic Co. Ltd. [1969] Comp LJ 82 (CLB) and Nandita Jain v. Bennett and Colman Co. Ltd. (Appeal No. 27 of 1972, dated February 17, 1998, in selected decision of the Company Law Board (third edition) that a minor, applying through his natural guardian could be registered as a member in respect of fully paid-up shares. Referring to Section 8(1) of the Hindu Minority and Guardianship Act, he submitted that a natural guardian is empowered to do all acts for the benefits of a minor and as such, in the present case, the father of the petitioner is empowered to acquire shares in the name of the petitioner, who is his minor son. He also drew our attention to the Departmental Letter No. 8/ 18(1)/63-PR, dated March 31, 1961, wherein the department has advised the Registrars not to raise any objection to the allotment or registration of transfer/transmission of shares to a minor and the entry of the minor in the register of members or in the return of allotment or in any other return. He further submitted that at present, the company itself is having minors as members. Referring to Fazulbhoi Jaffer v. Credit Bank of India Ltd., AIR 1914 Bom 128, he submitted that in this case, the High Court had held that a minor may be a member of the company. He further submitted that notwithstanding the fact that under the provisions of Section 111A, the company is bound to register transfer of shares being freely transferable, in the present case, the directors have not been vested with the powers to refuse registration in the articles of association of the company and as such the refusal is not sustainable as held in Naveen Kumar v. Kar-nataka Theatres Ltd. [1998] 93 Comp Gas 443 (Kar) and Karnataka Theatres Ltd. v. S. Venkatesan [1998] 93 Comp Gas 433 (Kar). He further submitted that the petitioner has shares registered in various other listed companies in the same manner in which he has requested in the present case. To establish this fact, he produced copies of the share certificates issued by the Gujarat Narmada Valley Fertilisers Company Limited, Nestle India Limited, Hindustan Lever Limited, Tata Tea Limited. He further submitted, that, in addition to the objections raised at the time of refusing to register the shares, in the reply to the petition, the company has taken certain other objections. One is that, with a view to circumvent the provisions of article 15, which says that no member shall hold more than one-tenth of the total number shares of the company, the father of the petitioner has acquired shares in the name of the minor and that there are pending proceedings regarding earlier acquisition of shares/transfer of shares by the petitioner, etc. These objections, according to him, do not merit any consideration as the same were not taken into consideration at the time of refusal by the board. Accordingly, he prayed that directions be issued to the company to register the shares as sought for.
4. Naganand, advocate appearing for the respondents submitted that by virtue of provisions of Section 41(2), a minor can never be admitted as member and his name cannot be entered in the register of members for want of the capacity to contract. He submitted that while a minor could become owner of shares, yet he cannot be registered as a member, especially when he has other bundle of rights which he cannot exercise for want of capacity as a member. He further stated that the father of the petitioner already holds 501 shares, accounting to one-tenth of the total shares in the company and as per article 15, he cannot hold any more shares and with a view to circumvent this provision, he has purchased the shares in the name of his minor son and seeks to get the same registered. Relying on Ram Kishan v. Kanwar Papers Private Ltd. [1990] 69 Comp Cas 209 (HP) and Kumaran Potty v. Venad Pharmaceuticals and Chemicals Ltd. [1989] 65 Comp Cas 246 (Ker) he submitted that for a person to become a member, he has to agree in writing which a minor cannot do for want of capacity in terms of Section 11 of the Contract Act and if he does so, then it is void in terms of Section 10 of the same Act. Accordingly, he submitted that this petition should be dismissed.
5. We have considered the pleadings and arguments of counsel. There is no specific provision in the Companies Act prohibiting a minor from becoming a member of a company. If at all there is any such prohibition, it is only an implied prohibition by virtue of the provisions of Section 41(2) read with Section 11 of the Indian Contract Act. Section 41(2) reads as follows :
"Every other person who agrees in writing to become a member of a company and whose name is entered in its register of members, shall be a member of the company."
6. The argument of counsel for the respondent is that while a person agrees in writing to become a member he enters into a contract with the company and since any contract entered into by a minor is void in terms of Section 10 of the Contract Act, the name of a minor cannot be entered as a member and as such he cannot become a member of a company. The term "agrees in writing" in Section 41(2) was inserted in 1960 on the suggestion of the Com panics Act Amendment Committee. The relevant portion of the report reads "it has been brought to our notice that in some cases, on the verge of liquidation, entries are made in the register of members of the names of persons who never applied for shares, in order to fasten liability on these persons as contributories. To avoid this contingency we suggest the addition of the words 'in writing' after the word 'agrees' in Section 41(2)" (see [1958] 28 Comp Cas (Journal section) 13, 21). Thus, the purpose of the words "agrees in writing" is to protect innocent persons from being made contributories in the event of liquidation of a company. In this connection, we may also refer to the English Act, wherein the words used are "a person agrees to become a member" and this term has been judicially interpreted that any form of consent given by a person to become a member is sufficient and the same need not be in writing. A person can seek to become a member in many ways, the common being, by applying for allotment of shares, by purchasing shares, by getting the shares by gift, by operation of law like inheritances, etc. While applying for allotment of shares, a person agrees in writing to become a member and as such the requirements of Section 41(2) are satisfied. In such cases, the requirements of a contract, like an offer and acceptance are fulfilled. However, the provisions of this Section cannot be strictly applied in all cases like inheritance of shares, transfer of shares, gift of shares, etc., by which one can become a member. For instance, in case of the death of a shareholder, as held by the Supreme Court in World Wide Agencies P. Ltd. v. Mrs. Margaret T. Desor [1990] 67 Comp Cas 607, there is an instantaneous transmission of shares to the legal heirs and what a company does is only the secretarial work of entering the names of the legal heirs once the requirements of the articles are complied with. Even Section 108 of the Companies Act only prescribes that on an intimation of transmission given to the company, the company is bound to transfer the shares subject to compliance with the provisions of the articles. Therefore, in such cases the question of agreeing in writing does not arise. A view may be taken that by lodging the transfer instruments/intimation of transmission, the transferee or the person to whom the shares are transmitted, agree in writing to become a member. But it may not strictly be in compliance with the provisions of Section 41(2). We have already indicated the object/purpose for which the words "in writing" were inserted in Section 41(2). In this background, if we examine whether the provisions of Section 41(2) are mandatory or directory, it would be apparent that the same is not mandatory but only directory. This is the view expressed by the Karnataka High Court in Shri Balaji Textile Mills Pvt Ltd. v. Ashok Kavle [1989] 66 Comp Cas 654. Thus, if a company enters the name of a person in the register of members, treats him as such by paying him dividend, etc., the company will be stopped from claiming otherwise only on the ground that he had not agreed in writing to become a member. The same may be true of a person who has for quite some time enjoyed the benefits of the membership by getting dividends, etc., to claim that he is not a member since he had not agreed in writing. Principles of estoppel and waiver will be applied. Therefore, to become a member, it is not always necessary that one should agree in writing.
7. In this background, we have to examine the issue before us, as to whether a minor is barred from becoming a member of a company on the ground that he is incapable of agreeing in writing. Assuming that in terms of Section 41(2) a minor cannot agree in writing to become a member, the settled law is that the natural guardian of a minor could enter into contracts on behalf of the minor for the latter's benefit and in such cases, such contracts are binding on the minor. In this connection, we may refer to Section 8(1) of the Hindu Minority and Guardianship Act, 1956, which reads : "Powers of natural guardian.--(1) The natural guardian of a Hindu minor has power, subject to the provisions of this section, to do all acts which are necessary or reasonable and proper for the benefit of the minor or for the realisation, protection or benefit of the minor's estate ; but the guardian can in no case bind the minor by a personal covenant". Thus, it is clear that a guardian could agree in writing on behalf of a minor to become a member. In this connection, we may refer to the decision of the Company Law Board in R. Balaraman v. Buckingham and Carnatic Co. Ltd. [1969] Comp LJ 82 (CLB) wherein it had observed "it is true that under Section 11 of the Contract Act a minor cannot enter into a contract but it is equally true that the guardian of a minor can enter into a contract on behalf of the minor and which would be a valid contract binding upon the minor provided it is for the benefit of the minor. Since the shares sought to be transferred in the names of the minor daughters of the appellant are fully paid-up shares, there will be no personal covenant to bind the minors, if these fully paid shares are transferred in the names of the minors. It is true that under Section 41 of the Companies Act, an agreement in writing is required from a person to become a member of the company. Only such application on behalf of a minor applicant could, in law, be made by his guardian. In the present case, the appellant is the natural guardian of his minor daughters, in whose names the fully paid up shares registered in his name with the respondent are proposed to be transferred by him. Section 41(2) of the Companies Act read with Schedule I, Table "A", clause 19(1) would appear to indicate that the agreement in writing could be made by an adult himself or by his duly constituted agent or by the guardian of a minor on behalf of a minor. The three objections raised by the respondent, therefore, do not appear to be sound to justify refusal by the respondent to register transfer of the fully paid shares from the name of the appellant to that of the three minor daughters in the register of members of the respondent. The appellant, as the guardian of each of the three minor daughters, has applied for transfer of the shares to the names of the three minor daughters as represented by him as natural guardian. By showing these minors as represented by the natural guardian, as members of the company in the register of members, it would not be a case of a trust and Section 153 of the Companies Act would not govern this case because the shares would be registered in the names of the minors themselves as represented by the guardian and the members will be the minors themselves. There appears no question of trust involved in this case to be hit by Section 153 of the Companies Act", We concur with the above observation. While doing so, we have taken a pragmatic view that in the Indian environment, the parents, with a view to provide for their children, major or minor--invest funds in various forms--fixed deposits, landed properties, various securities, etc. Even bank accounts are opened in the names of minors. All such investments are for the benefit of the minors. Section 11 of the Contract Act is a beneficial provision enacted in favour of minors and we feel that this beneficial provision should not be used to their detriment. Therefore, we are of the view that there will be no bar in the shares registered in the name of a minor indicating therein the name of the guardian representing the minor. As a matter of fact, a large number of companies, some of which Seshadri mentioned, have minors represented by their guardians, as members. Accordingly, we do not find any justification in the stand of the company, that in terms of Section 41(2) of the Act, the company could not register the shares as sought for. In regard to the other objection which was not a part of the decision of the board when they rejected the request for registration of transfer, it is that the father of the petitioner had purchased the shares in the name of the minor only to circumvent the provisions of Article 15. This article does not bar a member from acquiring more than one-tenth shares. It only restricts the voting rights to one-tenth shares, if one holds more than that. Section 111A stipulates that the shares of a public company are freely transferable and any stipulation in the articles contrary to the same, putting fetters on the free transferability, would be hit by the provisions of Section 9 of the Act.
8. Accordingly, we direct the company to register the transfer of the impugned shares in the names of Master Gautam R. Padival (minor) represented by father and natural guardian M. Ratnavarma Padival, jointly with Aruna Padival (mother), as sought for, within a month from the date of receipt of this order. No order as to costs.