Karnataka High Court
Srikanta Datta Narasimharaja Wadiyar vs Venkateswara Real Estate Enterprises ... on 11 August, 1988
Equivalent citations: ILR1989KAR2562
JUDGMENT Bopanna, J.
1. A Preliminary objection is raised by the contesting respondents on the maintainability of the company petition under sections 397, 398 and 402 of the Companies Act, 1956 (in short, "the Act), on the ground that the petitioner is not a member of the first respondent-company and that therefore, he cannot invoked the aforesaid provisions of the Act. A similar objection was raised in Company Petition No. 8 of 1982 by the contesting respondent in that petition and that was the subject-matter of Original Side Appeal No. 2 of 1985 before a Devision Bench of this court in Shri Balaji Textile Mills Pvt. Ltd. v. Ashok Kavle [1989] 66 Comp Cas 654 to which was a party. The Division Bench had ruled that if a person was admittedly treated as a member of the company and satisfied the company court that he is a shareholder of a company by virtue of allotment of shares in his favour which is evidence not only in the register of other document maintained and filed by the company, it is not open to the company to contend that for the purpose of section 397 and 398 of the Act, a shareholder must comply with the condition precedent stipulated in section 41(2) of the Act.
2. It was further held by the Division Bench :
"(i) The first part of section 41 deals with the deemed membership and the second part of it deals with persons other than subscribers to the memorandum of the company.
(ii) The marginal note to section 41(1), viz., definition of 'member' does not bring out the true scope of section 41(2) of the Act. The marginal note does, not, in any way, control the true scope and effect of section 41(2). Neither the marginal note to section 41 not the headnote to section 41 has any implication or bearing on the interpretation of the word 'member'. The word 'member' under sections 397 and 398 of the Act will have to be construed in the light of section 2(27) of the Act and the other various provisions and not with reference to section 41(2) of the Act.
(iii) The underlying purpose of section 41(2) is that a person must give his consent in unequivocal terms by applying in writing for allotment of shares. But it does not mean that the company cannot allot the shares even when a person has complied with the requirement of section 41(2) of the Act.... Even compliance with section 41(2) of the Act would not be a mandatory requirement but only directory.
(iv) The allotment of shares is a matter of contract between the parties and that a contract could be either express or implied and if a person is treated as a shareholders of the company either by entering his name in the register of members or by any subsequently treating him as a member, his right of membership cannot be questioned by the company on the ground that he has not complied with section 41(2) of the Act."
3. That judgment was taken in appeal to the Supreme Court by Special leave by the respondents and the Supreme Court has left that question open. Ordinarily, notwithstanding the fact that the Supreme Court has left the question open, this court, as the company court, would be bound by the decision of the Division Bench in the aforesaid original side appeal and this court could have followed the decision of the Division Bench and overruled the preliminary objections raised by the respondents in this petition. But in that appeal, a couple of decisions of the Supreme Court which, according to the respondents, have a bearing on this point were not brought to the notice of the Division Bench and, therefore, the Division Bench did not have the benefit of those decisions nor an opportunity to consider the applicability of those decision in so far as they relate to the question of maintainability of this petition. That is the reason why elaborate arguments were heard on the question of maintainability of this petition with reference to the pleading of the parties and also to the three decision of the Supreme Court which, according to the respondents, throw some light on the question of maintainability.
4. From the voluminous pleadings filed before this court, a few indisputable facts could be culled in so far as they relate to the question touching on the maintainability of this petition. The petitioner is the son of late His Highness Jaya Chamarajendra Wadiyar who was the erstwhile Maharaja of Mysore (hereinafter referred to as "His Highness") Late Highness had entered into certain transactions with one A. S. Chamaraju with a view to develop certain immovable properties which belonged to him absolutely. Those properties are the Bangalore place situate in the heart of Bangalore city with its extensive gardens, vacant lands, other building and appurtenance thereto. The idea of late Highness was to develop this property by making it a five star hotel since he found that after the stoppage of the privy purse that was annually due to him, he was not in a position to maintain the royal household and, therefore, with a view to earn a substantial income from the properties in question, he consulted and collaborated with one A. S. Chamaraju for the development of this property. According with one A. S. Chamaraju for the development of this property. Accordingly, a company by name Sri Venkateswara Real Estate Enterprises (P.) Ltd. was floated by His Highness and Chamaraju and that company is respondent No. 1 in this petition.
5. The memorandum and articles of association of respondent No. 1 company is produced as annexure B in the company petition. The signatories of the memorandum of association are the late Highness, his wife, his two daughters and one Sri N. Nagarajppa, palace advocate, and one Sri Venkatesha Iyengar, supposed to be an industrialist, and A. Chamaraju. The number of equity shares taken by them are as follows :
Shares Late Highness ... 2,000 His wife ... 1,000 His first daughter ... 1,000 His second daughter ... 1,000 N. Nagarajappa ... 10 Industrialist Venkatesha Iyengar ... 10 Chamaraju ... 1,500
6. The others to whom shares were allotted are one A. V. Hampe Urs, A. S. Kuppu Raju, P. Achuthananda Raju and K. Rama Raju. This company was incorporated on January 11, 1971. The memorandum and articles of association of this company were filed with the Registrar of Companies for the purpose of incorporation on December 11, 1970, and on the very same day, an agreement of sale was entered into between His Highness as the Karta of the joint Hindu family and this company which is produced as the karta of the joint Hindu family and this company which is produced as annexure C in the company petition for the sale of the Bangalore palace. The sum and substance of this agreement is that the sale of the Bangalore palace should be made in favour of the company and each of the parties to the agreement should fulfil their part of the obligations in making the sale effective as there were certain hurdles both under the Urban Land Ceiling Act and other local Acts which came in the way of a clean sale in favour of the company. This agreement was followed by another agreement dated March 26, 1978, between the present petitioner and the other members of the family of His Highness on the one part and Sri Chamaraju and one Chamundi Hotel Pvt. Ltd. (Which, by that time, had come into existence) on the other part. The terms of that agreement may not be very material, but they throw some light on the proper interpretation of the original agreement (annexure C). A number of suit and counter-suits had been filed by that time between the parties as is evident from the second agreement (this agreement is hereinafter referred to as"the compromise agreement"). The compromise agreement provides that both the parties will co-operate and run the two companies, namely, Chamundi Hotel pvt. Ltd. and respondent No. 1 company and that the articles of the two companies would be got amended by them as per annexure F and G to the agreement and that both the companies would be run on the basis of the articles so amended; that, in the shares capitals of the two companies, shares representing 60 per cent. of the authorised capital would be alloted to No. 1 of the first party, i.e., the petitioner, and/or to his nominee; that the remaining shares representing 40 per cent. of the authorised capital of the said two companies would be alloted to the second party., i.e., Chamaraju and/or to his nominees. Under clause 9, the parties agreed that :
"A sum of 28,45,000 (rupees twenty-eight lakhs, forty-five thousand only) advanced by Sir A. Chamaraju and a sum of Rs. 3,00,000 (rupees three lakhs) advanced by party No. 4 and a further advance of Rs. 18,56,893.04 (rupees eighteen lakhs fifty-six thousand eight hundred and ninety-three and paise four) by party No. 3 to the late ex-Maharaja of Mysore shall proportionately be adjusted by allotment of the shares agreed to be purchased or subscribed to by the second party in the above-said two companies representing 40 per cent,of the authorised capital and corresponding adjustments are agreed to be made by the first party with the companies in the price agreed to be paid by the company to the first party for the sale of portions of the Bangalore palace properties to the said two companies. This is subject to the condition that the companies shall be vested with a valid legal title to a specific portion of the Bangalore palace and the two companies are granted necessary and appropriate exemption to own and bear the property under the Urban Land Ceiling and Regulation Act."
7. In terms of this compromise agreement, the parties further agreed that the suits more particularly mentioned in schedules I and 2 would be disposed of the manner particularly stated schedule 3.
8. The petitioner claiming to be the owner of certain shares in the first respondent under the will executed by this mother and wife of His Highness has now presented this petition complaining of mismanagement and oppression by the respondents in regard to the first respondent-company. He has relied on article 16(c) of the articles of association of respondent No. 1 company, the will left by his mother, the compromise agreement dated March 26, 1978, produced as annexure D and also another agreement dated January 29,1982 between the petitioner and the legal representatives of Sri A. Chamaraju since, by that time, he was no more, and the company. This agreement provides that schedule A to the property, i.e, the Bangalore palace, is held to be the absolute property of the first party, i.e, the petitioner and the members of his family.
9. In para 26 of the petition, the petitioner has explained the circumstances under he came into possession of 1,200 equity in the first respondent-company and they were transferred in the name of the petitioner as the petitioner was the sole heir and the legal representative of his father. The mother of the petitioner had 1,000 equity shares in the first respondent-company and the petitioner being the sole heir and legal representative of his mother, the said 1,000 equity shares were transferred to his name. Thus he is holding 1,200 equity shares in the first respondent company. The petitioner's sister, Meenakashi Devi, held at all material times 1,000 equity shares in respondent No. 1 company. Out of these 1,000 equity shares held by the said Meenakshi Devi, she transferred 10 shares to her husband, Lakshmikanth Raju Urs, and 10 more shares to the petitioner's wife, Smt. Pramoda Devi. Accordingly, the petitioner's sister,Meenakshi Devi, is holding 980 equity shares in the said company. Further, 1,000 equity shares of the first respondent were held at all material times by another sister of the petitioner, Smt. Gayathri Devi, which were transferred to B. K. Ramachandra (her husband) (since deceased). The heirs of the said Gayathri Devi are holding the said 1,000 equity shares. As on the petitioner's relatives were holding 3,200equity shares in the first respondent-company So, on the strength of this shareholding, the petitioner avers that he is a person who comes within the scope of section 399 of the Act and, therefore, this petition under section 397 and 398 is maintainable. In paras 27,28 and 28 of the petition, he has further averred as follows :
"After the agreement of compromise dated 29th January, 1982, was arrived at as hereinbefore started, there was a change in the constitution of the board of directors of the first respondent-company and the board thereafter comprised the following :
(a) Shri Srikanta Datta Narisimharaja Wadiyar.
(b) Smt. Meenakshi Devi.
(c) Sri M. R. Lakshmikanth Raj Urs.
(d) Sri N. Nagarajappa.
On or about July 18,1985, Smt. Pramoda Devi, wife of the petitioner, also became the director of the first respondent-company. The aforesaid board of directors was in the management of the respondent-company from January 29, 1982, till December, 1985 when the management of the first respondent-company was wrongly taken away from them by the members of A. Chamaraju group, being respondents Nos. 2 to 10.
The petitioner says that, by virtue of the said compromise agreement dated January 29, 1982, the Maharaja group became solely and exclusively entitled to manager the affairs of the first respondent-company and the Chamaraju group had no right, title or interest in the same. The petitioner says that the Chamaraju group handed over some of the records of the first respondent-company to the Maharaja group assumed the management of the first respondent-company to the Maharaja group. The Maharaja group assumed the management of the first respondent-company by virtue of the compromise agreement dated January 29, 1982. The petitioner says that the meetings of the general board of management were held from 1982 to December, 1985, wherein only the Maharaja group who were the only members and the shareholders were given notice and the Chamaraju group were not called as they were not entitled to any notice. The accounts were maintained and certified by the petitioners as the chairman and managing director of the company. The annual returns were also field by the petitioner as the chairman and the managing director of the company in the office of the Registrar of Companies at Bangalore. The petitioner says that his group solely managed the affairs of the company excluding the Chamaraju group who had surrendered all right, title and interest to the petitioner's group.
The petitioner says that Shri A. C. Chandrashekar Raju, managing director of Chamundi (P) Ltd, by letter dated January 13, 1986, addressed to the petitioner affirmed and recognised the compromise agreement dated January 29, 1982, between the parties (sic) the first respondent-company and informed the petitioner that, under the terms of the said agreement, Venkateswara Real Estate Enterprises Pvt. Ltd. has given to the group and Chamundi Hotel Pvt. Ltd. was given to Chamaraju group. The petitioner says that having regard to the aforesaid, Chamaraju group cannot claim any right or authority in respect of the management of the company or to interfere with the affairs of the company. The said Chamaraju group at present consists of Nos. 2 to 11.
Annexed herewith and marked K is the copy of the said letter dated January 13, 1986."
10. Some more facts have been placed by the petitioner in the rejoinder filed by him and they should be noticed. He has averred that the compromise agreements dated March 26, 1978, and January 29, 1982, clearly show that he has been dealt with by the respondents as a member of respondent No. 1 company and they have accepted and recognised his full right, to the shares held by him in the company and on account of such acceptance and recognition by the respondents they had agreed to transfer all right, title and interest of their group in respondent No. 1 company to his group and himself; that, pursuance of the agreement entered into on January 29, 1982, respondent No. 1 company was handed over by Chamaraju group to the petitioner's group for their exclusive management; that Chandrashekar Raju, one of the respondents, by his letter dated January 13, 1986, had affirmed the petitioner's right title and interest in the company and also confirmed the compromise agreement dated January 29, 1982, In para 3.6 of the rejoinder, the petitioner's right title and interest in the company and also confirmed the compromise agreement dated January 29, 1982. In para 3.6 of the rejoinder, the petitioner, the petitioner has averred that one Govinda Rao who is the manager of Chamundi Hotel Pvt. Ltd. had filed an affidavit in the Court of the Civil judge, Bangalore, is O.S. No. 10136 of 1986, wherein he has stated that respondent No. 1 company was handed over to the petitioner and in the meeting of the board of directors held contemporaneously on January 29, 1982, three directors from Chamaraju Group Tendered resignations which were accepted by the board of directors and that prior to the said resignations, the said three directors co-opted Shri Lakshmikanth Raju Urs, Smt. Meenakshi Devi and petitioners the directors of the company and he was appointed as the petitioners as the directors of the company and he was appointed as the chairman and managing director of respondent No. 1 company and since then, respondent No. 1 company has been under the control and management of the newly constituted board which later on co-opted Smt. Pramoda Devi; that as per the records of the company the other two directors, besides the above four mentioned, were Venkatesha Iyengar and N. Nagarajappa; that the petitioner took over the management of respondent No. 1 company in pursuance of the compromise agreement on and from January 29, 1982, and the directors of Chamaraju group resigned on January 29, 1982 and the board of directors newly newly constituted was in the management of respondent No. 1 company; that Chamaraju group had right, title or interest as members of the company and that that have surrendered all their rights, title and interest in the company and that by usurping the management they have committed serious acts of oppression which are mentioned in the petition.
11. There is some controversy about these facts averred in the petition as also in the rejoinder. But, in the statement of objections filed by the respondents, the preliminary objections which are now being considered by this court are;
(i) An application made by a person who does not possess the necessary qualification under section 399 or an application containing averments which do not satisfy the requirements of sections 397 and 398, do not constitute an application under those sections. The petitioner has not furnished material particulars about his vague and unspecific allegations to satisfy the requirements of sections 397 and 398.
(ii) An application made by a person not in possession of the statutory qualification under section 399 and an application which does not satisfy the requirements of sections 397 and 398 cannot be maintained.
(iii) The name of the petitioner is not shown as a member in the register of the company. Till his name is entered, it cannot be said that he can enjoy powers of a member, and the petition is premature. Persons neither registered as shareholders nor evincing interest to become one, cannot maintain a petition under sections 397 and 398. The petitioner has deliberately avoided referring to this material fact which goes to the root of the matter.
12. Learned counsel for the respondents, Mr. Raghavan, has relied on the averments made by the petitioner in the petition itself to show that the petitioner is not a member of the company. Mr. Raghavan places reliance on para 17 of the company petitioner has averred that certain difference and disputes had arisen between the petitioner and his family members with regard to the family properties as a result of which the petitioner was constrained to file a suit in O.S. No. 430 of 1974, on July 16, 1974, on the file of the Civil judge, Bangalore city; that the same ended in a compromise whereunder, the rights of the petitioner as the sole and exclusive heir of his father were accepted and admitted by his family members; that under the said compromise petition, the first wife of late His Highness Jayachamaraja Wadiyar released and relinquished all her rights in the properties of His Highness who had died by then. He has also relied on the averments made in para 22 of the petition that ever since the death of His Highness. Chamaraju who was the managing director of respondent No. 1 company went on promising to transmit the equity shares belonging to His Highness in favour of the petitioner though he put a rider that the transmission of the shares would be effect only after the disputes inter se between the family members of the petitioners (the legal heirs of His Highness) were resolved. In para 23 of the petition, the petitioner has averred that certain disputes and differences had existed among the legal heirs of His Highness as pointed out earlier; that the same were fully and finally settled and a family settlement was arrived at on July 16, 1984, whereunder, all the assets and estates of His Highness except a specified portion of the immovable property of Bangalore palace were agreed and admitted to belong to the petitioner absolutely; that, accordingly, the petitioner became the sole and absolute owner of the equity shares of the first respondent-company standing in the name of His Highness and they were transmitted to the name of the petitioner. Mr. Raghavan also relied on para 30 of the petition wherein the petitioner has averred that the Chamaraju group at present consisting Nos. 2 to 11, claiming to be in the management of the affairs of the company, is alleged to have convened the alleged extraordinary general meeting of the shareholders of the company and also the meeting of the board of directors on January 23, 1986; that at the alleged general meeting of the shareholders held on January 23, 1986, Shri A. C. Srinivas Raju was appointed as managing director of the company; that, at the alleged of the board directors held on January 23, 1986, 1,500 equity shares held by the estate of late Shri Chamaraju were transmitted in the names of the persons mentioned in the said resolution and 30 equity shares were transmitted in the names of the persons mentioned in the said resolution and 30 equity shares were allotted to the there directors mentioned in the said resolution so as to enable them to acquire the qualification shares under article 15 of the memorandum and article of association and Sri A. C. Srinivas Raju was authorised to operate the bank account of the company with Canara Bank. He has also relied on some of the averments made in the rejoinder to which I have already made a brief reference.
13. On these averments made by petitioner, one thing is clear and it is that the petitioner, by operation of law, claims to be a holder of certain equity shares in respondent No. 1 company. His family members are also holders of certain equity shares. The aggregate holding of the petitioner by operation of law, i.e. as heir of His Highness, and by inheritance under the will executed by his mother, is about 1,200 equity shares. On the strength of these holdings, he claims to be a member in terms of section 399 of the Act and accordingly he maintains that he is entitled to file this petition under sections 397 and 398 of the Act.
14. So, the question for consideration in this petition is very same question which the Division Bench of this court considered in O.S.A No. 2 of 1985 (Shri Balaji Textile Mills Pvt. Ltd. v. Ashok Kavle (hereinafter referred to as "Balaji Mills' case")). In what way the facts herein are distinguishable from the facts in Balaji Mills would incidentally arise for consideration. When it was pointed out to Raghavan that the Division Bench of this court has taken the view in Balaji Mills that section 41(2) of the act did not define what membership of the company is Mr. Raghavan very fairly submitted that decision, on the facts of that case, does not call for a second look and the observation made by the Division Bench that there was substantial compliance with section 41(2) of the Act would hold good for that case, but, in this case, there is no material on record to show that there was substantial compliance with the provisions of section 41(2) of the Act, though in this pleadings, such a contention was not raised. Additionally, Mr. Raghavan pressed into service the two decisions of the Supreme Court which learned counsel for either party failed to cite in Balaji Mills. Those two decisions are Balkrishan Gupta v. Swadeshi Polytex Ltd. [1985] 59 Comp Cas 563 (SC) and Life Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp Cas 548 (SC). Mr. Raghavan maintained that the test should be applied for determining whether a member comes within the scope of section 399 of the Act is whether he has got on the register of members or whether he has made any efforts to get on to get on to register of members. He maintained that this court should follow the aforesaid decisions for determining the question of maintainability on the facts and circumstances of this case.
15. That takes me to the question whether the Supreme Court in both Escorts' case [1986] 59 Comp Cas 548 as also Swadeshi Polytex's case [1985] 58 Comp Cas 563 laid down the law on the question of maintainability of a petition under section 397 and 398 of the Act. I will first take the case of a Swadeshi Polytex [1985] 58 Comp Cas 563 which was decided earlier . The real question that arose before the Supreme Court in that case is found at page 578 of the report. The Supreme Court, after narrating the relevant facts, raised the following questions :
"(i) Whether, by reason of the appointment of the receiver under the Land Revenue Act in respect of the shares of the Polytex Company held by the Cotton Mills Company, the Cotton Mills Company had ceased to have the rights of a member section 169 of the Act ?
(ii) Whether, by the attachment of the shares under section 149 of the Land Revenue Act, the Cotton Mills Company suffered any diminution or curtailment in its rights as a shareholder in respect of the shares so attached ?
(iii) Whether, by the pledge of certain shares, the Cotton Mills Company suffered any such diminution or curtailment ?"
16. Further Supreme Court posed the following additional question for consideration.
17. When does a shareholder cease to be entitled to exercise any of these rights, i.e., the rights under section 87, 169, 172, 176, 187 and 188 of the Act ?
18. While considering this question, the Supreme Court made certain general observations about the rights of the shareholders. What is the position of the shareholders in a company was considered by the Supreme Court with reference to its earlier decisions in R. Mathalone v. Bombay Life Assurance Co. Ltd. [1954] 24 Comp Cas 1 (SC) and in Kurapati Venkata Mallayya v. Thondepu Ramaswamy and Co., . The Supreme Court observed thus (at page 581) :
"Even where the holder of a share whose name is entered in the register of members hands over his shares with blank transfer forms duly signed, the transferee would not be able to claim the rights of a member as against the company concerned until his name is entered in the register of members. This court in Howrah Trading Co. Ltd. v. CIT , has observed at page 286 and 287 of 29 Comp Cas thus :
'The position of a shareholder who gets dividend when his name stands in the register of members of the company causes no difficulty whatever. But transfers of shares are common, and they take place either by a fully executed document such as was contemplated by regulation 18 of Table A of the India Companies Act, 1913, or by what are known as 'blank transfer's. In such blank transfers, the name of the transferor is entered, and the transfer deed signed by the transferor is handed over with the share scrip to the transferee who, if he so chooses, completes the transfer by entering his name and then applying to the company to register his name in place of the previous holder of the shares. The company recongnises no person except the one whose name is on the register of members, upon whom alone calls for unpaid capital can be made and to whom only the dividend declared by the company is legally payable. Of course, between the transferor and the transferee, certain equities arise even on the execution and handing over of a "blank transfer", and among these equities is the right of the transferee to claim the dividend declared and paid to the transferor who is treated as trustee on behalf of the transferee. These equities, however, do not touch the company, and no claim by the transferee whose name is not in the register of members can be made against the company, if the transferor retain the money in his own hands and fails to pay it to him.
A glance at the scheme of the Indian Companies Act, 1913, shows that the words "member", "shareholder", and "holder of a share" have been used interchangeably in that Act. Indeed, the opinion of most of the writers on the subject is also the same. Buckley on the Companies Acts, 12th edition, page 803, has pointed out that the right of a transferee is only to call upon the company to register his name and no more. No rights arise till such registration takes places.'"
19. The conclusion reached by the Supreme Court in that case is found on page 587. It reads :
"An order of attachment cannot, therefore, have the effect of depriving the holder of the shares of his title to the shares. We are of the view that the attachment of the shares in the Polytex Company held by the Cotton Mills Company had not deprived the Cotton Mills Company of its rights of vote at the meeting or to issue the notice under section 169 of the Act."
20. In the operative portion of the judgment, the Supreme Court observed (page 589) :
"It is also significant that the directors of the Polytex Company who knew that a receiver had been appointed in respect of the shares in question, that they had been attached by the Collector, that a part of them had also been pledged in favour of the Government of Uttar Pradesh and that orders had been passed under section 18AA(1)(a) of the Industrial (Development and Regulation) Act, 1951, taking over six industrial units of the Cotton Mills Company, did not question the validity of the notice. The Polytex Company had in this case rightly treated the registered holder, i.e., the Cotton Mills Company, as the owner of the shares in question and to call the meeting in accordance with the notice issued under section 169 of the Act. The appellants cannot, therefore, be allowed to raise any dispute about the validity of the meeting on any of the grounds referred to above."
21. This decision, in my view, is not an authority on the question touching on the maintainability of a petition on the ground that the person who claims to be a member, is not a member within the meaning of section 399 of the Act or section 41(2) of the Act. In this case, the shareholder's right to vote and the right to receive the notice of the extraordinary general body meeting arose for consideration and the point was whether the appointment of a receiver in regard to the shares held by the shareholder would affect the right of the shareholder to participate in the meeting and also to receive the notice of the extraordinary general meeting. These are the two limited questions that arose for consideration. For the purpose of deciding these two issues, the Supreme Court made certain general observations about the nature of the rights of a shareholder in a company under certain provisions of the Act mentioned in para 9, page 22 (See Supra P. 227.), above.
22. The next decision which was relied on by learned counsel, Mr. Raghavan, for the respondent is the well-known Escorts' case [1986] 59 Comp Cas 548 (SC). This is not a case which dealt directly or indirectly with the question of maintainability of a company petition under the provisions of section 399 of the Act. What the court considered in this case was the rights of a non-resident India who wanted to invest in shares of India companies. The question for consideration in that case was whether the permission of the Reserve Bank of India was necessary for a non-resident to invest in India companies and if so at what stage such permission should be obtained - either prior to the acquisition of shares of could it be ex. post facto and conditional subject to certain provisions of the Foreign Exchange Regulation Act; whether the Reserve Bank of India is the exclusive authority to decide whether foreign exchange regulations are complied with; whether the permission granted by the Reserve Bank of India cannot be questioned by any company or by the shareholder or by the court. These are the questions which arose for consideration in that case. Some of the observations made by the Supreme Court in that case should be noticed since it is contended by Mr. Raghavan that that case, Life Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp Cas 548(SC) is an authority on the question of maintainability and he has also read out extensively certain portions of the judgment. At page 573 of the report, the Supreme Court has referred to two principal questions which were argued before it. They are :
"Two of the principal questions argued before us were whether the permission contemplated by section 29 was previous permission or whether the permission could be granted ex post facto and whether the purchase of the shares by the foreign investor of Indian nationality/origin in this case involved any contravention of the Foreign Exchange Regulation Act or the Non-Residents' Investment Scheme. To appreciate how the questions arise, it is necessary to state here a few facts."
23. Again, at page 595 of the Judgment, the Supreme Court had made a reference to the letter of the solicitor of respondent No. 18 in that case addressed to the petitioners solicitors :
"... the controversy regarding transfer of shares has been raging throughout the length and breadth of the country and various forums including the shareholders' associations, chambers of commerce and other public bodies have been making observations and suggestions on such issues ..."
24. At page 597 of the judgment, the Supreme Court makes a reference to one of the facts of the case :
"Escorts Ltd. having refused permission to register the transfer of shares, one would have though that it was thereafter up to the purchasers or the sellers of the shares, if they were so mined to proceed to take further appropriate action in the matter to have the transfer of shares registered. However, it was not they that moved it, but it was Escorts Ltd. that filed the writ petition out of which the present appeals arise. They explain that the pressure of circumstances was such that they had no option except to go to court under article 226 of the Constitution."
25. As regards Writ Petition No. 3063 of 1983 before the Bombay High Court out of which the appeal before the Supreme Court arose, the Supreme Court, at page 599 of the report, observed thus :
"Writ Petition No. 3063 of 1983, thus filed in the High Court of Bombay was perhaps both a protective and a pre-emptive strike. The writ petition is at once remarkable for its length and the number of prayers. The writ petition runs to as many as 172 page and innumerable documents running into several volumes are now placed before us. There were originally thirteen prayers (a) to (m). To these prayers, four more prayers were added subsequently. Prayers (a), (b) and (c) seek declaration that Circular No. 18, dated September 19, 1983, is illegal and void as contrary and the provisions of the Foreign Exchange Regulation Act, as arbitrary and issued for collateral purposes, as constituting an abuse of statutory authority and as violative of articles 14, 19(1)(c) and 19(1)(g) of the Constitution. Prayer (d) is for a declaration that the purchases of shares made by and/or on behalf of the Caparo Group Ltd. are illegal and violative of the Foreign Exchange Regulation Act, the circulars of the Reserve Bank issued from time and the provisions of the Securities Contracts (Regulation) Act, 1956, and the bye-laws of the Stock Exchange. Prayers (e), (f), (g), (h), (i) again relate to Circular No. 18, dated September 19, 1983. Prayer (j) is directed towards securing the relevant documents. Prayer (k) is to restrain the first respondent (Union of India) from pressuring the company to register the transfer of shares."
26. At page 610 of the Report, the Supreme Court, after considering extensively the facts of the case, has looked into the statutory provisions and observed as follows :
"Before proceeding further, it is just as well to have a clear picture of the nature of the property in shares, the law relating to transfer of property in share under the law and the effect of the provisions of the Foreign Exchange Regulation Act. For that purpose, it is desirable that we read together all the relevant statutory provisions relating to the acquisition, transfer and registration of shares. Besides referring to the relevant statutory provisions, we will also refer to the leading cases on the topic."
26. Then the Supreme Court dealt with the relevant provisions of the Act at page 617 and 618 of the report. After considering the nature of the right of the shareholders, the Supreme Court observed (p. 617) :
"On an overall view of the several statutory provisions and judicial precedents to which we have referred, we find that a shareholder has an undoubted interest in a company, an interest which is represented by his shareholding Share is movable property, with all the attributes of such property. The rights of shareholder are (i) to elect directors and thus to participate in the management through then; (ii) to vote on resolutions at meeting of the company; (iii) to enjoy profits of the company in the shapes of dividends; (iv) to apply to the court for relief, in the case of oppression; (v) to apply to the court for relief in the case of mismanagement; (vi) to apply to the court for winding up of the company; (vii) to share in the surplus on winding up. A share is transferable but while a transfer may be effective between transferor and transferee from the date of transfer, the transfer is truly complete and the transferee becomes a shareholder in the true and full sense of the tern, with all the rights of a shareholder, only when the transfer is registered in the company's register. A transfer effective between the transferor and the transferee is not effective as against the company and persons without notice of the transfer until the transfer is registered in the company's register. Indeed, until the transfer is registered in the book of the company, the person whose name is found in the register alone is entitled to receive the dividends, notwithstanding that he has already parted with his interest in the shares. However, on the transfer of shares, the transferee becomes the owner of the beneficial interest though the legal title continues with the transferor. The relationship of trustee and 'cestui que trust'. is established and the transferor is bound to comply with all the reasonable directions that the transferee may give. He also becomes a trustee of the dividends as also of the right to vote. The right of the transferee 'to get on the register' must be exercised with due diligence and the principle of equity which makes the transferor a constructive trustee does not extend to a case where a transferee takes no active interest 'to get on the register.'"
27. From these observations of the Supreme Court, could it be said that the Supreme Court laid down the law on the question relating to maintainability of the petition under section 397 and 398 of the Act ? I am of the view that in both these cases, the question of maintainability under section 399 of the Act did not arise for consideration directly or indirectly. What was considered in those cases was the rights of shareholders in general. In the first case, the right of a shareholder vis-a-vis the right of the receiver of these shares. In the second case, what arose for consideration was that right of NRI shareholders in relation to the provisions contained in the Foreign Exchange Regulation Act and the requisite permission that had to be obtained from the Reserve Bank of India for validating the transfer of shares. So, while deciding those cases, certain general observations were made by the Supreme Court as to the nature of the rights of the shareholdedrs. Hence, it cannot be said that these two decisions have laid down the law or at any rate there are any observation in the nature of obiter dicta on the question touching on the maintainability of the petition. It was pointed out by this court to Mr. Raghavan that in both the cases, the Supreme Court did not take into consideration the definition of "member" as defined under section 2(27) of the Act, since the Division Bench, in Balaji Textile Mills [1988] ILR KAR 1213; [1989] 66 Comp Cas 654, to which I was a party, had placed much reliance on the definition of the words "member" as defined under section 2(27) of the Act which reads as under :
"member', in relation to a company, does not include a bearer of a share-warrant of the company issued in pursuance of section 114."
28. Section 41 of the Act reads as under :
"Definition of 'member'. - (1) The subscribers of the memorandum of a company shall be deemed to have agreed to becomes members of the company and on its registration, shall be entered as members in its register of members.
(2) Every other persons who agrees in writing to becomes a member of a company and whose name is entered in its register of members, shall be member of the company."
29. The Division Bench has observed that the marginal note is misleading since, ordinarily, the statute does not prescribe two modes of definition of a particular word unless the context otherwise required and in this case, section 2(27) itself had made it clear that "member", in relation to a company, does not include a bearer of a share warrant of the company issued in pursuance of section 114 of the Companies Act.
30. Mr. Raghavan submitted that section 2(27) of the Act does not define the word "member" at all. According to him, if the Legislature intended that section 2(27) defines the word "member", the Legislature would have used a different language. But, here it is in the negative form and that definition must be held to be good only for the purpose of section 114 of the Act. According to him, there are other provisions under section 2 which clearly indicate that section 2(27) is not a definition clause. He shares or by guarantee. But, in the case of section 2(27), the language used is in a negative form and "member" in relation to a company, does not include a bearer of a share-warrant of the company issued in pursuance of section 114 of the Act. I am unable to accept this meaning to be given to "member" under section 2(27) after a close look at the very same provisions of section 2. Under section 2(4), we find the word "associate" and it means, in relation to any secretaries and treasurers, any of the following and no others :
"(a) Where the any member of such firm; any partner of
secretaries and relative of any such member; and any other
treasures are firm in which any such member, partner
firm : or relative is a partner; any private of
which the firm first-mentioned, or any
such member, partner, relative or other
firm is the managing agents, or secretaries
and treasures, or a director, or the
manager; and any body corporate at any
general meeting of which not less than
one-third of the total voting power in regard
to any matter may be exercised or controlled
by any one or more of the following, namely,
the firm fist-mentioned, any such member or
members, partner or partners, relative or
relatives, other firm or firm, and
private company or companies;
(b) Where the (i) any subsidiary or holding company of
secretaries and such body corporate; the
managing agent or treasure are a body
secretaries and treasures, or a director the
corporate : manager or an officer of the
body corporate or of any subsidiary or
holding company thereof; any partner or
relative of any partner or relative of any
such director or manager, partner or
relative, us a partner; (ii) any other body
corporate at any general meeting of which
not less than one third of the total voting
power in regard to any matter may be
exercised or controlled by any one or
more of the following, namely, the body
corporate and the companies and other
person specified in paragraph (i) above;
and (iii) any subsidiary of the other body
corporate referred to in paragraph
(ii) above :
Provided that where the body corporate is
the secretaries and treasurers of the
other body corporate referred to in
paragraph (ii) above, a subsidiary of
such other body corporate shall not
be an associate in relation to the
secretaries and treasures aforesaid; and
(c) Where the in addition to the persons mentioned in sub-
secretaries and clause (b), any member of the private company
treasures are a or body corporate;
private company
or a body corporate
having not more than
fifty members :
Explanation. - If One person is an associate in relation to another within in the meaning of this clause, the latter shall also be deemed to be an associate in relation to the former within its meaning."
31. Under section 2(6), "board of directors" or "board" in relation to a company, means the board of directors of the company. Under section 2(31) "officer who is in default", in relation to any provision referred to in section 5, has the meaning specified in that section. If we go to section 3, we find that the language used is in the affirmative form to define "company", "existing company" "private company" but under section 3(iv), "public company" means a company which is not a private company. The language of the statute either may be in the affirmative language or in the negative language. Likewise, the definition of certain words and phrases in any statute could be in the affirmative language or in the negative language. I do not find any special significance in the definition of the word "member" under section 2(27) of the Act at all, because that definition is not in the affirmative language. The words "member" under section 2(27) means, unless the context so requires "shareholder" whenever we talk about a company, excepting the person who is a bearer of a share warrant of the company issued in pursuance of section 114 of the Act. That is clear form section 114 and 115 of the Act. But he also can becomes a member of a company if the conditions in section 115 are satisfied. In my view, the two decisions of the Supreme Court which have taken into consideration the definition of the word "member" under section 2(27) are not applicable to the fact and circumstances of the case.
32. I have earlier noticed the general rights of a shareholder of a company in Swadeshi Polytex [1985] 58 Comp Cas 563 (SC) and Escorts' case [1986] 59 Comp Cas 548 (SC). But a better authority for the exposition of the law on the nature of the rights of shareholders is found in the decision of the Supreme Court in Vasudev Ramachandra Shelat v. Pranlal Jayanand Thakar [1975] 45 Comp Cas 43. The facts of that case have a close bearing on the facts of this case. In that case (headnote) : "B had executed a registered gift deed purporting to transfer certain shares held by her in different companies to her brother, V. The deed was signed by the donor as 'the giver' as well as by the donee as 'the acceptor' of the gift and was attested by six witnesses. In it, the donor specified and gave particulars of the the shares meant to be gifted and undertook to get the name of the donee put on the register of the companies concerned. The donor declared that she was thenceforth a trustee for the donee with regard to the income she might get due to the fact that her name was still entered in the registers of the companies. The doctor delivered the registered gift deed together with the share certificates to the donee, and had also signed several blank transfer share certificate to the donee, and had also signed several blank transfer forms so as to enable V to get the transfers registered in the share registers of the companies, but, before, the transfers could be entered in the registers, B died." The point for consideration was whether, after the death of the donor before the registration of the deed of transfer, the transferee of the share would be entitled to claim dividends due on the shares. The Supreme Court, after considering the nature of the property in the share in relation to section 6 of the Transfer of Property Act and also in relation to the Indian Companies Act, 1913, as it was then in the statute book observed (page 52) :
"The requirements of form or mode of transfer are really intended to ensure that the substantial requirements of the transfer have been satisfied. They subserve an object. In the case before us, the requirements of both section 12 and section 123 of the Transfer of Property Act were completely met so as to vest the right in the donee to obtain the share certificates in accordance with the provisions of the company law. We think that such a right is in itself "property" and separable form the technical legal ownership of the shares. The subsequent or "full rights of ownership" of shares would follow as a matter of course by compliance with the provisions of company law. In other words, a transfer of "property" rights in shares, recognised by the Transfer of Property Act, may be antecedent to the actual vesting of all or the full rights of ownership of shares and exercised of the rights of shareholders in accordance with the provisions of the company law.
33. The Companies Act of 1913 was meant "to consolidate and amend the law relating to trading companies and other associations ". It is concerned with the acts and proceedings relating to the formation, running, and extinction of companies, with rights, duties, and liabilities of those who are either members or officers of such companies, and of those who deal with companies in other capacities. Its subject-matter is not transfer of property in general. It deals with transfers of shares only because they give certain rights to the legally recognised shareholders and impose some obligations upon them with regard to the companies in which they hold shares. A share certificate not merely entitles the shareholder whose name is found on it to interest on the share held but also to participate in certain proceedings relating to the company concerned. It is for this purpose that section 34 of the Companies Act, 1913, enables the making of "an application for the registration of the transfer of shares in a company ... either by the transferee". A share certificate is a prima facie evidence, under section 29 of the Act, of the title to a share. Section 34 of the Act does not really prescribe the mode of transfer but lays down the provisions for "registration" of a transfer. In other words, it presupposes that a transfer has already taken place. The manner of transfer of shares, for the purposes of company law, has to be provided, as indicated by section 28, by the articles of the company, and in the absence of such specific provisions on the subject, the regulations contained in Table "A" of the First Schedule of the Companies Act apply."
34. Further, the Supreme Court observed (at page 57) :
"Hence, in our opinion, cases which deal with inchoate rights to shares do not assist the respondent because at least a gift of the right to obtain the transfer of shares in the books of the companies concerned was shown to be complete on the terms of the gift deed of Bai Ruxmani coupled with the handing over of the share certificates and the subsequent signing of the blank transfer forms. It was not a case of a bare expression of an intention to donate. The donor had done everything which she could reasonably be expected to do to divest herself of her rights in the shares donated."
35. These observations would go to show that the shares in the company which were held by His Highness and by his wife were, by operation of law, in the hands of the petitioner and they could be treated as property under the Transfer of Property Act. There is no bar to transfer of shares under the Transfer of Property Act. The shares held by the other members of the petitioner's family came to their respective hands by operation of law. So, on these undisputed facts, is it necessary that the petitioner should get on the members' register as observed by the Supreme Court in Escorts' case [1986] 59 Comp Cas 548 to maintain a petition under section 398 of the Act. In my view, by the subsequent agreement in 1982 to which I have made a brief reference and the first compromise agreement made in the year 1978, the respondents have recognised the petitioner as a member of the company. As a matter of fact, in one of the litigations pending in the trial court, the respondents have admitted that the petitioner is a director of the first respondent-company. It is common ground that to become a director, the petitioner must hold the necessary qualification shares within two months from the date of appointment as the director. It is seen from the proceedings of the extraordinary general meeting dated January 23, 1986, i.e., just before the filing of the petition that the petitions was given leave of absence from the board meeting since he was away in the United Kingdom at that time. This is also reflected in the proceedings of the extraordinary general meeting dated August 23, 1986, of respondent No. 1 company. So, from this resolution and also from the terms of the compromise agreement made in the year 1978 and the compromise agreement entered into in the year 1982, the petitioner's right as shareholder of respondent No. 1 company was unequivocally admitted and the parties have also acted on the basis that he is a shareholder of the company. It may be for reasons best known to him that he did not get on the register of members. That may go against him for the rectification of the register of the company in appropriate proceedings. I understand that in the connected Company Petition No. 32 of 1987, such a question is pending. But, on that point, Mr. Raghavan relied on the decision of the Gujarat High Court in Gulabrai Kalidas Naik v. Laxmidas Lallubhai Patel [1977] 47 Comp Cas 151. That was a case where the question of maintainability did arise for consideration. The Gujarat High Court observed thus (at page 158) :
"Now, section 399(1) provides that members, set out in clauses (a) and (b) of sub-section (1) thereof, alone have a right to apply under sections 397 and 398. Apart from the qualifying number for eligibility to maintain a petition, those who invoke the court's jurisdiction, must indisputably be members of the company and this is very natural because section 397(1) provides that any member of a company, who complains that the affairs of a company are being conducted in a manner prejudicial to public interest or in any manner oppressive to any member or members, may apply to the court. One can thus complain of oppression or conduct prejudicial to public interest, if one is a member of the company. similarly, section 398(1) provides that a member of a company, complaining of things set out in the section, may apply for relief to the court, and it is absolutely well-settled that for relief to under sections 397 and 398, the oppression complained for relief to under sections 397 and 398, the oppression complained must of be in the capacity of members. The language must be in the capacity of members. The language of sections 397 and 398 leaves no room for doubt that the oppression complained of must not only be complained of by a member of the company, but oppression must be of some part of the members (including himself) in their capacity or his capacity as members or member of a company as such (vide H. R. Harmer Ltd., In re [1958] 3 All ER 689; [1959] 29 Comp Cas 305 (CA)). Therefore, it is crystal clear that the complaint must come forth from a member and it must be a complaint to be made to the court by a member. The prerequisite for invoking jurisdiction under section 399(1), is that the complaint must come forth from a member. One has to be a member before one can complain of oppression as a member of the company".
36. But the court also observed in that case thus (at page 159) :
"Now, it may be that, is a given case, the petitioners invoking the court;s jurisdiction under sections 397 and 398 are in a position to show that even though their names are not to be found in the register of members of the company, yet they have such an indisputable and unchallengeable title to membership of the company that the court may entertain a petition at their instance".
37. So, the Gujarat High Court has not categorically ruled that the petition should be thrown out on the ground that the petitioner has not got on the register of members. If, in a given case, it is shown that, though the name of a person is not shown in the register of members, if he had been treated as a member by the company, the company court can always exercise its equity jurisdiction. This court should not decline to exercise its equity jurisdiction on the ground of mere technicality. Till the year 1986, i.e., till the matter was taken to this court in this petition, there was no shred of doubt on the rights of the petitioner to represent his interests as a shareholder in respondent No. 1 company. It was contended that in a number of meetings he has signed the proceedings of the said meetings and even the balance-sheet prepared by respondent No. 1 company right from the year 1971 to 1986 does not show any indication that the petitioner had been excluded from the membership of the company either on the ground that he has not inherited the shares or otherwise. In the circumstances, I am of the view that the decision of the Division Bench in Balaji Textile Mills [1988] ILR 1988 Kar 1213; [1989] 66 Comp Cas 654, is applicable, on the undisputed material on record.
38. Before closing, one point arises for consideration and that is whether the decisions of the Supreme Court in Escorts [1986] 59 Comp Cas 548 and Swadeshi Polytex [1985] 58 Comp Cas 563 should be treated as binding precedents. The question what a binding precedent is has been dealt with in the decision in A. Aziz v. Managing Director, KSRTC [1986] ILR Kar 2007. I have relied on the decision of the Supreme Court in Prakash Amichand Shah v. State of Gujarat, , in that case, which reads thus (at page 480) :
"Before embarking upon the examination of these decisions, we should bear in mind that what is under consideration is not a statute or a legislation but a decision of the court. A decision ordinarily is a decision on the case before the court while the principle underlying the decision would be binding as a precedent in a case which comes up for decision subsequently. Hence, while applying the decision to a later case, the court which is dealing with it should carefully try to ascertain the true principle laid down by the previous decision. A decision often takes its colour from the questions involved in the case in which it is rendered. The scope and authority of a precedent should never be expanded unnecessarily beyond the needs of a given situation."
39. Following the aforesaid decision, I am of the view that it would be wrong to treat the decisions in Escorts [1986] 59 Comp Cas 548 (SC) and Swadeshi Polytex [1985] 58 Comp Cas 563 (SC) as precedents for the question to be considered in this case. The observations made by the Supreme Court in those cases were not on the maintainability of a petition under sections 397 and 398 as that question did not come up for consideration either on the pleadings or in the arguments or in any hypothetical manner. In the circumstances, the decision of the Division Bench holds good for this case also. Whether the petitioner is entitled to succeed on the allegations of oppression and mismanagement is another matter which this court will have to examine separately after taking the evidence of the parties. I, accordingly, hold that the petition is maintainable.
40. The law in England on this point appears to be the same. Mr. Nanavathi learned counsel for the petitioner, has invited my attention to the book by L. S. Sealy on Cases and materials in Company Law wherein it is observed :
"Section 459(2) makes it clear that the personal representatives of a deceased member and other persons upon shares have devolved by operation of law shall have the same remedy as a member. This was not expressed to be so under the former section, but the courts had construed the section in the same sense anyway."
41. In Buckley on the Companies Acts, volume I, it is observed thus :
"The company's affairs are being conducted in a manner oppressive to some parts of the members including, except where the Department of Trade is the petitioner, the petitioner himself. For the purpose of a petition under this section, 'member' includes the personal representatives of a deceased member. It is to be noted that, although the cross-heading preceding the section is 'minorities', the section itself does not require that the oppressed members should be the minority. Members with a minority beneficial interest may, by having voting control, be able to oppress those with the majority beneficial interest."
42. In a case reported in [1970] 1 WLR 1194 the Chancery Division of the High Court of Judicature in U.K. in In re, Jermyn Street Turkish Baths Ltd. (Pennycuick J.) dealing with cases of oppression under the English Companies Act observed (at page 1205) :
"Counsel for the respondents contended that the petitioners are not members of the company and have no locus standi to present this petition, bearing in mind that the petition under section 210 of the Act of 1948 can only be presented by a member of the company. I have already held that the petitioners were duly registered as members of the company, and that, of course, is an answer to this contention. But even if that were not so, it seems to me that personal representatives of a deceased member must be regarded as members of a company for the purposes of section 210. I was referred on this point to the decision of Buckley J. in Bayswater Trading Co. Ltd., In re [1970] 1 WLR 343 (Ch D) in which it was held that for the purpose of section 353 of the Act the word 'member' must include representatives of a deceased member. It seems to me that section 210 requires that a similar meaning should be put on the words 'a member' in that section. Therefore, the petitioners had a locus standi to present this petition."
43. I do not think, regard being had to the language of section 399 in our Act, that this court should make a distinction between English law and Indian law on this point.
44. Accordingly, the preliminary objection is overruled.
45. Post this petition for interim relief on September 2, 1988.