Company Law Board
Cruickshank Company Ltd. And Anr. vs Stridewell Leather Pvt. Ltd. And Ors. on 29 March, 1995
Equivalent citations: [1996]86COMPCAS439(CLB)
ORDER
1. This is a petition under Section 111(4), (5) and (6) of the Companies Act, 1956, filed by Cruickshank and Co. Ltd. (hereinafter called "Cruickshank") and Maharashtra Distilleries Ltd. (hereinafter called "MDL") with regard to 8,000 equity shares in Stridewell Leather Pvt. Ltd. (hereinafter called "Stridewell"). The other respondents in the petition besides Stridewell are Bio Foods Pvt. Ltd. (hereinafter called "Bio-Foods"), the transferor of the impugned shares and Madan Dwaraka Das Chhabria (hereinafter called "MDC"), the transferee of the shares. The paid up capital of Stridewell in May, 1992, when the cause of action arose, was 10,000 equity shares of Rs. 10 each fully paid which were held by four members as follows :
(a) Bio-Foods 8,000
(b) Cruickshank 999
(c) MDL 999
(d) Tracstar Investments Ltd.2
10,000
2. The case of the petitioners, briefly stated, is that Bio-Foods purportedly transferred its holding of 8,000 equity shares in Stridewell in favour of MDC contrary to the provisions of Article 7 of the articles of association of Stridewell which provides for pre-emptive rights to the existing members of the company, and, as such, the transfer is illegal. According to the petitioners, at the relevant time, the board of the company consisted of five directors, all of whom were employees of the Shaw Wallace group, Bio-Foods ought to have sent, in writing, the offer to sell its holding of 8,000 shares to the other three members of the company, placed the matter before the board for determination of the fair value, and only if the other members had declined the offer, the shares could be transferred to a non-
member. Any non-member is also bound by this condition and as such, MDC cannot acquire the shares contrary to the articles. Consequently, neither Bio-Foods nor MDC can validly claim any right as shareholders of Stridewell. The petitioners, though ready and willing to buy the shares, were denied their right contrary to the articles. The petitioners, therefore, prayed for deletion of the MDC and substitution of the name of the petitioners in the register of members.
3. The petitioners have also filed an application under rule 14 of the Company Law Board Regulations, 1991, for permission to file a joint petition and the same was granted by us.
4. A joint reply was filed on behalf of all the respondents signed by one Arun Kumar Jain as a director of respondents Nos. 1 and 2 and as the power of attorney holder of respondent No. 3. The reply contends that the petition is not maintainable for four reasons:.-
(a) It is filed after a lapse of more than two years ;
(b) In C. P. No. 30 of 1993 relating to Stridewell filed before the Company Lay Board in May, 1993, under Section 397/398 of the Companies Act, 1956, one S.K. Bhattacharya is a respondent and is an employee of the Shaw Wallace and Co. Ltd., who is in the know of things, but did not whisper anything about the alleged violation in the reply to that petition ;
(c) In C. P. No. 30 as referred to, the above fact of transfer of shares from Bio-Foods to MDC was mentioned by the petitioners against which the present petitioners did not state anything and now they cannot plead ignorance and, as such, it is an abuse of the process of law ; and
(d) The relief is" purely discretionary which cannot be granted by the Company Law Board, since the petitioners have approached belatedly.
5. It is also stated Without admitting that at best the petitioners may seek the deletion of the name of the transferee, but not of both the transferor and the transferee. According to the reply, Bio-Foods is ultimately owned and controlled by MDC and R.D. Chhabria and as such the transfer is within the framework of the articles. It is further alleged that the address of the registered office of Stridewell has been wrongly stated. According to the reply; the authorised capital of the company is only Rs. 1 lakh and not Rs. 2 lakhs and the act of alleged increase of authorised capital is already under challenge in C.P. No. 30 of 1993. The allotment of 10,000 shares for Rs. 1 lakh to Malleswara Finance is also challenged in C.P. No. 30 and the shareholding pattern is not correctly stated by the petitioners. It is further pointed out that three of the five directors of Stridewell as stated in the petition have resigned on April 10, 1992, which fact has been confirmed by the Company Law Board in its judgment in C.P. No. 29 of 1992.
6. The reply admits that on May 20, 1992, the shares held by Bio-Foods were transferred to MDC based on the board resolution of Bio-Foods. The transfer by Bio-Foods was challenged by S.K. Bhattacharya, who claims to be a director of Stridewell as well as Bio-Foods through a suit in the Delhi High Court. The resolution of Bio-Foods for transfer though initially stayed by the High Court, with the dismissal of the application, the stay is no longer operative and the directors of Bio-Foods have also ratified the A transfer subsequently. S.K. Bhattacharya has never challenged the transfer on the ground of violation of the articles of association. Thus, the petitioners have acquiesced in the transfer. The reply states that the petitioners are wrongly interpreting Article 7 which is devoid of substance.
Since the articles permit transfer between members inter se Bio-Foods could have transferred to Tracstar exclusively which is under the control of the respondents. There is no requirement to give an offer in writing to all the other members of the company. On the contrary, the article states that the shares are transferable only to a member and the prohibition is against sale to a non-member so long as a member is willing.
It is further stated that Bio-Foods is also entitled to transfer to relatives and as Bio-Foods and Tracstar are owned and controlled by MDC and R.D. Chhabria, the articles should be interpreted to lend business efficacy. Even assuming that the impugned transfer is void, the parties can at best be put in the same position as before.
7. Since there has been a split in the Chhabria family, attempts are being made by the petitioners to gain control of the companies which are under the control of MDC and R.D. Chhabria. In view of this conflict, the facts of the case have been distorted. According to the reply, the petitioners have not even made out a prima facie case and the reliefs sought cannot be granted.
8. At the hearing held on September 29, 1994, Shri Ashok Sen, senior advocate, appearing for the petitioners elaborated the provisions of Article 7 of the articles of association and stated that the article confers a preemptive right to the existing members to acquire the shares of another member in case the latter intends to transfer his shares. According to him, the articles of association are a binding agreement between the members inter-se as well as the company and as such the transferor member is bound to offer the shares to the existing members.
9. Shri Sen cited Palmer's Company Precedents to show the various forms of restrictions on transfer in case of private companies. He further cited Palmer's Company Law (24th edition) to state that the restrictions which a private company may choose to impose by its articles may be wide in character and easy to satisfy or the opposite. He cited the various types of pre-emption clauses which are described in para 40-14 on page 618. According to him, where the pre-emption clause provides that a share may be transferred to any member, but shall not be transferred to a person who is not a member so long as any member is willing to purchase the same at a fair value, the transfer to an outsider is illegal, and it brings into operation the pre-emption right of the other members.
10. He also cited Bishan Singh v. Khazan Singh, AIR 1959 SC 878, in which the Supreme Court has held that a pre-emptor in the case of a transfer of property has two rights, viz., (1) an inherent or primary right to the offer of a thing about to be sold, (2) a secondary or remedial right to follow the thing sold. The secondary right is simply a right of substitution in place of the original vendee. Shri Sen also referred to Order XX of the Civil Procedure Code, 1908, to state that a decree is bound to be granted in favour of any party who is a pre-emptor in substitution of any other transferee. Shri Sen also cited page 582 of Ramaiya's Guide to the Companies Ad to state that a pre-emption clause takes away the right in respect of a member to freely transfer the shares. The right of pre-emption automatically arises when there is a proposal of sale to an outsider. He also cited Halsbury's Laws of England to state "where the intent of one to accord a right of pre-emption to the other member of the company, if there is no substantial compliance with the procedure laid down, the shareholder denied such right is entitled to an appropriate injunction to protect his position". He also refuted the contention of the respondents that even if there is participation by the petitioners, this does not amount to acquiescence or estoppel. In this connection, he cited the decision of the Bombay High Court in S.G. Pommeret v. Sakal Papers Pvt. Ltd. [1990] 69 Comp Case 65, Shri Sen, therefore, submitted that equities are in favour of the petitioners, and as such, the rectification to delete the names of the respondents and incorporate the names of the petitioners should be ordered.
11. Appearing on behalf of the respondents, Shri S. Sarkar, senior advocate, refuted the applicability of the Supreme Court decision cited by Shri Sen by stating that it relates to pre-emption with regard to immovable property and the same could not apply to shares. He further stated that the first part of Article 7 confers the right of free transferability of the shares of the company. In this connection, he cited the Supreme Court decision in V.B. Rangaraj v. V.B. Gopalakrishnan [1992] 73 Comp Cas 201; AIR 1992 SC 453, and stated that according to the decision, shares are presumed to be freely transferable and restrictions on transfer are to be construed strictly and, so, when a restriction is capable of two meanings, the less restrictive interpretation will be adopted by the court. According to the Supreme Court, the restriction must be set out expressly or must arise by necessary implication and any ambigious provision is construed in favour of the shareholder wishing to transfer. According to him, the first part of Article 7 contains no restriction on transfer to any member or to his or her legal descendant which means that transfer to a member and close relatives is not barred. He justified the impugned transfer as the transferee is the ultimate controlling party of the transferor-
company. Moreover, the transferee is also in ultimate control of another member company, namely, Tracstar, as such, it amounts to effecting a transfer to another member or a close relative. In this connection, he cited Greenhalgh v. Mallard [1943] 2 All ER 234 (PC), to state that when the provisions of the articles contained a power to transfer to a member and a procedure is to be adopted only in case of transfer to a non-member, any transfer to one of the members to the exclusion of other members cannot be challenged. He further stated that in the present case, there is not even the prescription of a procedure, and as such, no violation of the articles is involved. Shri Sarkar also cited Safeguard Industrial Investments Ltd. v. National Westminster Bank Ltd. [1982] 1 All ER 449 (CA) to state that when the equitable or beneficial interest in shares is vested in another party, the transfer cannot be sought by restrictions in the articles.
The articles only cover the legal title, and it is improper to apply such restrictions to transfers of beneficial interest. He further reinforced this argument with the decision in Haivks v. McArthur [1951] 1 All ER 22 (Ch D). He also cited, Vasudev Ramchandra Shelat v. Pranlal Jayanand Thakar, AIR 1974 SC 1728 ; [1975] 45 Comp Cas 43, to state that the sub stance of a transaction vesting the property rights in the shares cannot be subservient to some rigidly prescribed form required to be meticulously observed and insistence on the prescribed form only savours of archaic and outmoded jurisprudence.
12. Dealing with the second part of Article 7, Shri Sarkar stated that even if there is a technical violation with regard to the procedure, the net effect can only be that the transfer could be set aside. He stated that the decision of Bio-Foods to transfer its holding is not irrevocable and it can revoke its decision. Even if the relief prayed for, viz., deleting the name of transferee, is granted the effect would be that the name of Bio-Foods would be automatically restored and, in any case, the prayer that the names of the petitioners should be entered in place of the transferee is inconceivable both in fact and in law.
13. He further submitted that the Company Law Board has a discretionary jurisdiction under Section 111(4) and since the petitioners were aware of the transfer which had featured in other proceedings before the Company Law Board and since there is delay and laches on their part, such a discretion should not be exercised and the Company Law Board should dismiss the petition.
14. Before dealing with the merits of this case, we would like to record that, on behalf of Stridewell Leather Pvt. Ltd. (respondent No. 1), two advocates appeared with conflicting interests. Neither of them produced a board resolution in support. In view of this, we decided not to recognise the presence of the two advocates of Stridewell as representatives.
15. The crux of the matter in this case is whether the impugned transfer of 8,000 shares is in violation of Article 7 of the article of association and, if so, is it liable to be set aside ? And in case the transfer is set aside, whether the prayer of the petitioners to substitute their names in place of the transferors is permissible ?
16. Admittedly, respondent No. 1 is a private company and, as such, restrictions on transfer of shares are required to be included in the articles of association. Article 7 of the articles of association reads as follows :
"Any share may at any time be transferred to any member of the company or to his or her lineal descendant of such father or mother or to his or her wife or husband as the case may be, provided that no share shall be transferred to any person who is not a member of the company so long as any member is willing to purchase the same at a fair price which shall be determined by the directors".
17. As submitted by learned counsel for the petitioners, there are many forms by which the restrictions can be couched in the articles of association of a private company. At the same time, it is also true that as pronounced by the Supreme. Court in V.B. Rangaraj v. V.B. Gopalakrishnan [1992] 73 Comp Cas 201 ; AIR 1992 SC 453, the restrictive clauses have to be strictly interpreted. In the present case, the first part of Article 7 does not really contain any restriction. On the other hand, it is permissive inasmuch as transfer is allowed from one member to another or to the member's lineal descendants. When the clause really does not provide any restriction, we should not read or imply a restriction therein. The real restriction is contained in the proviso in Article 7. Strictly interpreted, the restriction is with regard to transfer to a non-member. In this connection, we do not accept the contention of the respondents that the transferee is not a non-member as he is jointly in ultimate control of the transferor-company. The meaning of member cannot be stretched to persons who are in ultimate control of a member company. The restrictions on transfer to a non-member are operative only when (a) any other member is willing to purchase and (b) at a fair price to be determined by the directors. In A order to implement this sort of restrictions, articles may provide for a procedure to be adopted before transfer to any non-member. In this case, as rightly contended on behalf of the respondents, no such procedure has been prescribed. However, it would have been appropriate for the directors to ascertain the willingness, if any, of other members to purchase the shares in line with the spirit of the articles before approving the transfer.
In case any member was willing, the directors should have determined a fair price and offered the shares to the willing members. Apparently, the directors have failed to comply with the spirit of the article. Of course, it is always open to a transferor to withdraw the offer for transfer at any point of time before the transfer is effected. In this connection, it is necessary to keep in mind the fact that there is a continuing dispute between the two Chhabria groups with regard to the various companies under their control. It is also evident that respondent No. 2 at the relevant point of time was under the control of respondent No. 3 jointly with others.
Similarly, it is further evident that one of the four members of the company Tracstar is also under the control of respondent No. 3 jointly with others at the relevant point of time. This being so it would have been only necessary for the board of directors of respondent No. 2 to transfer the shares if at all they want to transfer, in the name of Tracstar instead of in the name of respondent No. 3.
18. At the same time, it is also evident that the board of directors of respondent No. 2 has not ensured strict compliance with Article 7 of the articles of association, thereby rendering the transfer violative of the provisions of the articles. What we have to look into is not what could have been done by the board, but what has actually been done. That being so, we have no hesitation in holding that the impugned transfer is in violation of Article 7 and is liable to be set aside. We, therefore, set aside the transfer of 8,000 shares in the name of respondent No. 3.
19. The next question is whether the petitioners are entitled to get their names substituted in the place of the transferor. In this connection, the submissions of Mr. Sen are relevant. According to learned counsel, the petitioners have a pre-emptive right as per Article 7 which according to him entitles the petitioners to the right of substitution in the place of the original vendee. The crucial issue is whether Article 7 really confers a pre- emptive right, and if so, whether it accrues only to the petitioners. A plain reading of Article 7, clearly establishes that there is a restriction on the transferor in transferring to a non-member. It is a negative clause which prevents a transferor to transfer the shares to a non-member in case any other member is willing to purchase and that too at the fair price as determined by the board of directors. As such, the article does not confer a pre-emptive right to any particular person, but the intention is only to put a restriction on transfer to non-members. In the present case, the transferor has breached an agreement with the other members of the company by transferring the same to a non-member. Even this breach could be said to be absolute only if the two conditions, namely, that a willing member was denied and a fair price was fixed are fulfilled. The pre-emptive right is a mere presumption based on the restriction contained in the articles. The pre-emption, if at all it exists has to be positively spelt out and should also be specifically identified to the particular persons. This is normally done by prescribing a procedure in case of transfers. In the present case, even if the presumption of pre-emptive right is conceded, the same is not available only to the two petitioner members. The petitioners may be absolutely right in case the pre-emption right had been given exclusively to the petitioners or either of them as in the case of S.G. Pommeret v. Sakal Papers Pvt. Ltd. [1990] 69 Comp Cas 65 (Bom). The question of transferring shares to either or both of the petitioners arises in case of a contingency, i.e., the petitioners getting the shares is contingent upon :
(a) the transferor's willingness to transfer to the petitioners as already found in the decision of the Privy Council in Greenhalgh v. Mallard [1943] 2 All ER 234 (PC). So long as the transferor has a revocable right, the other members cannot insist on transfer to them even if they have a pre-emptive right. Thus, the choice is with the transferor to choose the transferee. Just because the transferor has chosen a non-member does not mean that he has lost the right to choose another transferee ;
(b) Even if the transferor does not choose a transferee, a fair price has to be determined by the directors which has not been done in the present case.
(c) Any member may be willing to purchase the shares and at the relevant point of time, there was no willingness available of any member to purchase the shares. Thus the pre-emptive right is not automatic to a section of the members excluding another section. There is also no pro-vision for any offer to be made to the other members, nor is there any provision for a pro-rata offer to all the other members. It is open to the transferor to choose any member to the exclusion of the other members. The position would have been different if a procedure is prescribed in the articles.
20. We are convinced that a pre-emptive right cannot be presumed, but has to be conferred by means of a specific clause/procedure.
21. Even in Palmer's Company Law, volume I, cited by the learned advocate for the petitioners, the various types of pre-emption clauses illustrated therein show that the pre-emption right would accrue specifically to certain parties. In the present case, no such identification of party has been done in the articles of association. On the other hand, it is possible for the transferor to choose one of the members for transfer in which case Article 7 will not be attracted. Hence, it is not possible for us to accede to the prayer of the petitioners to substitute the name of the petitioners in the place of the transferor or transferee. On the setting aside of the transfer, the net result would be as if the transfer had not taken place. As already held, the transfer is not in accordance with Article 7, and the only result would be that the register of members stands rectified and the entry consequent to the impugned transfer gets reversed. The company, accordingly, shall carry out the rectification within ten days from the date of receipt of a copy of this order. The consideration, if any, paid by the transferee shall be restored by the transferor. The petition is disposed of accordingly.
22. While disposing of the case, we are conscious of a petition under Section 397/398 of the Companies Act, 1956, before the Principal Bench of this Board relating to Stridewell. Since the basic question raised in the present case relates to the transfer of 8,000 shares by Bio-Foods to MDC and whether such transfer is in conformity with Article 7 of the articles of association and whether the petitioners get title to these shares as preemptors, it is immaterial as to which group was in the management of the company at the relevant point of time. As such, we are not expressing any opinion as to who is in control of the affairs of the company.
23. No order as to costs.