Company Law Board
Mallina Bharathi Rao vs The Gowthami Solvent Oils Limited And ... on 29 December, 2000
ORDER
S. Balsubramanian, Vice-Chairman
1. In this order, we are considering the powers of a company, incorporate in its articles of association, a provision relating to cancellation of the membership of a member and consequent transfer of the shares held by that member.
2. The petitioner is a shareholder of the Gowthami Solvent Oils Ltd. (the com- pany), a deemed public company, holding 350 shares. The petitioner has been comp- laining to various authorities regarding the functioning/management of the company. Considering these complaints as prejudicial to the interests of the company, the com- pany amended its articles by which if 90% of the shareholders in number and share capital so decide that a member shall cease to be a member by a special resolution, then, the membership of such member shall stand cancelled immediately and on pass- ing of such a resolution, such shareholder shall transfer the shares held by him/her to another existing member of the company on a consideration to be determined in terms of the articles,. After the articles were amended, an EOGM of the company was held wherein the general body resolved to cancel the membership of the petitioner and get her shares transferred to a member of the company. On passing of this resolu- tion, the company asked her to surrender her share certificates and indicate the price which according to her was the fair market value. In that letter it was also advised that in case no reply was received, the company itself would fix the price and transfer the shares to a member. When the petitioner declined to sell her shares, the company advised her that it had determined the fair price of the shares at Rs. 668 per share and that her shares were being transferred to another shareholder by one of the directors of the company as an agent of the petitioner to sign the transfer instruments and that a demand draft was being enclosed towards the consideration for the shares. Aggrieved by this action of the company, the petitioner has filed this petition under Section 111 of the Company Act (the Act) on the ground that her name has been removed from the register of members without sufficient cause on the ground that the amendment to the articles itself is void.
3. Shri Raghavan, Senior Advocate, appearing for the petitioner submitted that the petitioner had been a member of the company for long holding 350 shares. Since the management of the company had not been conducting the affairs of the company in a proper manner, she was complaining to various authorities only with the view to ensure that there was proper management in the company. Even assuming that the company is aggrieved of this action, yet, the action of the company in cancelling the membership of the petitioner is unlawful and invalid. According to him, the only manner by which the membership of a shareholder could be terminated is by way of forfeiture in terms of the articles or by voluntary transfer of shares. He pointed out that it is unknown in law that a company could cancel the membership by passing a resolution in the general meeting. he pointed out that there is no statutory provision either in the Companies Act or otherwise which would approve the action taken by the company. He pointed out that by taking this unilateral decision of transferring her shares and deleting her name from the register of members, the proprietary right of the petitioner has been infringed in violation of the provisions of Article 300A of the Constitution. He submitted that while the articles of a company could regulate the rights of a shareholder, it cannot provide for extinguishment of the right of being a shareholder. Therefore, he submitted that the amendment to articles providing for her compulsory acquisition is bad in law. In addition, he pointed out that no share- holder can be compelled to part with his/her shares without his/her consent. Further, in this case, he pointed out that the transfer instruments had been executed by one of the directors as an agent of the petitioner. The petitioner never appointed the said director as her agent and, therefore, he had no authority to sign the transfer instru- ments. Referring to Section 108 of the Act, he pointed out that the transfer instruments have to be signed by the concerned shareholder or his/her authorised signatory. Fur- ther, as per this section, the transfer instruments have to be accompanied by the share certificates. In the present case, the petitioner continues to be in possession of the share certificates and, therefore, without the said certificates the transfers could not have been effected. Referring to Mannalal Khetan v. Kedarnath Khetan AIR 1977 SC 536:
(1997) 47 Comp Cas 185 (SC), he pointed out that the provisions of Section 108 of the Act are mandatory and non-compliance with the provisions of this act would make the transfer invalid. He also pointed out that in view of the share certificates being with the petitioner, the company would have issued the duplicate certificates which would be in complete violation of the relevant rules on the subject that duplicate certi-
ficate could be issued only after satisfying that the original certificates have been lost or destroyed as held in Shoe Specialities Ltd. v. Trackstar Investment Ltd. (1996) 5 Comp LJ 502 (Mad) : (1996) 88 Comp Cas 471 (Mad). He also pointed out that any amend- ment to the articles which would affect the rights/obligation, of an existing share- holder would have only prospective effect and not retrospective effect. Referring to Articles 8 and 14, he pointed out that these articles relate only to a voluntary transfer by a shareholder and not to compulsory transfer, as has been proposed in Article 16A to Article 16C as amended. He also pointed out that the petitioner never received notices for either of the two shareholders meeting -- the one for amending the articles on 30.10.1999 or the one on 30.11.1999 when the resolution was passed to cancel the membership of the petitioner. He pointed out that notwithstanding the non-receipt of the notice, even if the petitioner had attended this meeting, in view of her negligible holding, the resolutions would have been passed. He pointed out that the very pur- pose of the amendment to the articles and cancellation of her membership were with the mala fide intention of preventing the petitioner from voicing her grievance against the management of the company. He also pointed out that the petitioner had filed a civil suit challenging the cancellation of her membership which she has withdrawn with a view to file the present petition. Summing up his arguments, Shri Raghavan prayed that the amendment to articles be declared as also the transfer of the shares held by the petitioner being in violation of the provisions of Section 108 of the Act be declared as invalid. he further prayed that in view of the action of the company in re- moving the petitioner's name from the register of members being mala fide, her name should be put back on the register of members. He clarified that the petitioner has not encashed the draft sent to her towards consideration for her shares.
4. Shri Arvind Datar, Senior Advocate, appearing for the respondent, pointed out that the petitioner had already invoked the jurisdiction of the civil court by filing a suit challenging the transfer of her shares which has been unconditionally with- drawn. Therefore, in terms of Order 11 Rule 2 of the Civil Procedure Code, the peti- tioner is barred from filing the present petition. As far as cancellation of her member- ship is concerned, he pointed out that there is nothing in the Companies Act that pro- hibits cancellation of the membership of a shareholder. In terms of Section 9 of the Act, only if the articles contain a provision contrary to the provisions of the Act, then such a provision in the articles is void. Since there is no provision in the Act prohi- biting a company from cancelling the membership of a shareholder, the new articles introduced in the articles of association of a company in this regard are not attracted by this section. Since the general body is supreme in the affairs of a company, can pro- vide for any article as it deems fit as long as the same is through a special resolution. He pointed out that this company, even though a deemed public company, it continues to have the characteristics of a private company. Referring to Section 111(13), he poin- ted out that the provisions of Sections 108, 109 and 110 can be regulated by the arti- cles of a private company. He also pointed out that right form the incorporation of the company, Article 13 provides for a director acting as an agent of the transferor to transfer the shares held by him in case he fails to transfer the shares after the deter- mination of the fair value. Even otherwise, he pointed out that there is no pleading in the petition in regard to the violation of the provisions of Section 108 and as such, the same should not be considered by the Company Law Board. In regard to the powers of a company to expel a member, he referred to Sidebottom v. Kershaw Lease & Com- pany Ltd. (1920) Ch D 154 wherein it was held that the articles of a company could provide for expulsion of a member. Therefore, he submitted, that the articles provi- ding for expulsion of a member is valid and lawful. In regard to the contention of Shri Raghavan that such an expulsion by compulsory acquisition of shares would be in violation of the fundamental rights under the Constitution, he pointed out to the decision in Vishwanathan (S.) v. East India Distilleries and Sugar Factories India Ltd. (1957) 27 Comp Cas 175 (Mad). He contended that the amendment to the articles was carried out in the interest of the company and not with any mala fide intention, and as such, the Company Law Board should not interfere in this matter. As far as the contention of Shri Raghavan that any amended article would have only prospective effect, he pointed out to Section 31(2) of the Companies Act, according to which any alteration made in the articles would be as valid as if originally contained in the articles mean- ing thereby [that] the alternation would apply to all the existing shareholders. He also pointed out that the amendment to the Articles was carried out in a transparent manner as also the cancellation of the membership, with due notice to the petitioner.
5. We have considered the pleadings and arguments of the counsel, in regard to the contention of Shri Datar that unconditional withdrawal of the suit would disenti- tle the petitioner from filing the present petition, it is to be noted that the provisions of Civil Procedure Code are not applicable to the proceedings before the Company Law Board and further that the Company Law Board being the designated forum in respect of rectification of the register of members, we do not consider that uncondi- tional withdrawal of the suit would be a bar to file the present petition.
6. In an EOGM held on 30.10.1999, the shareholders passed the following resolu- tion to alter the articles:
"1. Resolved that the present Article 16 shall be renumbered as 16A. The follow- ing Article 16B shall be inserted after 16A.
2. Resolved that in the event 90% shareholders in number and share capital so decide that a member shall cease to be a member by a special resolution in a general body meeting (extraordinary/annual general meeting), the membership of such shareholder shall stand cancelled immediately.
3. Resolved that the following Article 16C shall be inserted after 16B.
4. Resolved that immediately after passing the resolution as stated in Article 16B, such shareholder shall transfer his/her shares to any other individual who is an existing member of the company following the procedure laid down in Articles 9 to 13.
7. The Explanatory Note under Section 173(2) enclosed with the notice for the meeting reads as follows:
"The company is formed by group of close relatives as a private limited com- pany in the year 1974 and placed restrictions for transfer of shares. During the period of its existence, the Board of directors found that one of the shareholders is bent upon causing trouble to the administration of the company's affairs, some- times, by the member or members' proxy. Unnecessary litigious complaints were being made to various official authorities with ulterior motive to harass the manage- ment. In view of the resentment of the conduct of this shareholder, the general body of the company feels that it is necessary, in the interest of the company to provide for cancellation of the membership of such shareholder/shareholders for the better and cohesive administration of the affairs of the company. To achieve that objective, the articles of association are proposed to be amended as above."
8. After passing of this resolution, another EOGM was held on 30.11.1999. This meeting was attended by 39 out of 40 shareholders of the company holding 99.37% shares and this meeting passed the following resolution.
"Resolved to decide to cancel the membership of Shrimati M. Bharati Rao and get her shares transferred to the existing member as per procedure laid down in Article 9 to 13 of the articles of association of the company."
In the explanatory Note set along with the notice for this meeting, various allega- tions against the petitioner had been noted.
9. After the resolution was passed on 30.11.1999, the company wrote to the peti- tioner a letter stating that in view of her cessation as a member of the company, her shares would be compulsorily acquired by any of the existing members as per the provisions of the articles of association of the company and therefore, she should surrender the share certificates intimating the price which according to her was the fair market price. The letter had also cautioned that in case the company did not receive a reply within 2 weeks, the company itself would fix the fair price as per the proce- dure laid down in the articles and transfer the shares at that price to one of the exis- ting members. IN response to this letter, the petitioner wrote to the company by a letter dated 14.12.1999 intimating that the termination of her membership without notice her was invalid and that she had no intention of selling her shares. By a letter dated 9.2.2000, the company informed the petitioner that the Board of directors had authorised one Shri Sree Mannarayana, a director of the company to act as her agent and to execute the transfer deed for the shares held by her in favour of one Shri R. Ramachandra Rao at a price of Rs. 668 per share as decided by the Board as the book value per share and that the transfer had been effected in the records of the company and that a draft for Rs. 2,33,800 was being sent along with that letter. Thus, the name of the petitioner was omitted from the register of members giving cause to her to file this petition under Section 111.
10. The relevant sub-section of Section 111 applicable to this case is Sub-section (4). According to this sub-section, if the name of a member is omitted from the register of members without sufficient cause, then the aggrieved person can move the Company Law Board for rectification of the register of members. It has been held by the Supreme Court in Ammonia Supplies Corporation (P) Ltd. v. Modern Plastic Containers Pvt. Ltd. (1998) 4 Comp LJ 211 (SC) : (1998) 94 Comp Cas 310 (SC) that the word 'sufficient cause' is to be tested in relation to the Act and the rules and that 'without sufficient cause entered or omitted to be entered' means done or omitted to be done in contradic- tion of the Act and the rules or what ought to have been done under the Act and under the rules but was not done. Now, in the present case, since the name of the peti- tioner has been omitted from the register of members, we shall only examine as to whether such omission is in contradiction of the provisions of the Act. For examining this issue, we are not looking into as to whether a company has the powers to expel a member, as even after expulsion, such a person would continue to be a member in the register of members as long as the shares are held in his name.
11. As per Section 108 of the Act, a company shall not register a transfer of shares unless a proper instrument of transfer duly stamped and executed by or on behalf of the transferor and by or on behalf of the transferee...has been delivered to the com- pany along with the certificate relating to the shares...The provisions of this section have been held to be mandatory in Mannalal case, supra. Articles 8 to 15 of the com- pany deal with transfer of shares. As per these articles, no shares can be transferred to a non-member subject to certain exemption and that in case of transfer, the pro- posed transferor has to give a notice to the company specifying the value that he fixes as the fair price and the company will in turn offer these shares to other members and once the company finds a purchasing member, then the selling member is bound to transfer the shares to the purchasing member. Article 13 is important as in terms of this article, the shares held by the petitioner have been transferred. Article 13 reads as follows:
"If in any case, the proposing transferor, after having become bound as afore- said, makes default in transferring the share, the company may receive the pur- chase money, and the proposing transferor shall be deemed to have appointed any one director as his agent to execute a transfer of the share to the purchasing member or person selected as aforesaid, and upon the execution of such transfer, the company shall hold the purchase money in trust for the proposing transferor. The receipt of the company for the purchase-money shall be a good discharge to entered in the register in purported exercise of the above power, the validity of the proceedings shall not be questioned by any person".
12. A regarding of this article would show that it enables the company to authorise one of the directors of the company to sign the transfer instruments on behalf of a shareholder which provision is directly against the provisions of Section 108 of the Act, according to which, the instruments have to be signed by the transferor or by one authorised by the transferor. Section 9 of the Act makes it abundantly clear that any provision in the memorandum or articles of the company which is repugnant to the provisions of the Act is void. Further, in the present case, the company had not only authorised a director to sign the transfer instrument on behalf of the petitioner, it also effected the transfer without the share certificates, which is also in violation of the provisions of Section 108 according to which the certificates relating to the shares have also to be lodged with the company along with the transfer instruments. Thus, the entire process of transfer has been in violation of the mandatory provisions of Sec- tion 108 and as such, the omission of the name of the petitioner from the register of members was without sufficient cause. The learned counsel for the respondents pointed out that there is no pleading in respect of Section 108 and that by virtue of Section 111(13), the provisions of Section 108 are not applicable to a private company. When a point of law is involved,we do not think that absence of pleading would bar a person from raising the same in the arguments. In the present case, the learned counsel for the petitioner made extensive arguments on the provisions of Section 108 and therefore, the same merits consideration by us. In regard to the provisions of Section 111(13), it is to be noted that this sub-section does not exclude private companies from the appli- cation of the provisions of Section 108, but only stipulates that the articles of a private company could contain provisions for enforcing restrictions on the right to transfer shares of the company, notwithstanding the provisions of Section 108. Article 13 under which the shares have been transferred in the present case, therefore, does not fall within the provisions of Section 111(13) as this article does not deal with enforce- ment of restrictions on transfers, but does away with the need to comply with the mandatory provisions of Section 108, which is not contemplated by Section 111(13).
13. In this connection, we may beneficially refer to a similar case decided by the Madras High Court in Madhav Ramachandra Kamath v. Canara Banking Corporation Ltd. AIR 1941 Mad 354 : (1941) 11 Comp Cas 78 (Mad). This case considered in terms of Section 34 of the (Indian) Companies Act, 1913, which is similar to Section 108 of the present Act. In that case, the articles provided for expulsion of a member on cer- tain grounds. In terms of the articles, a member was expelled. Thereafter, the articles were amended to provide for empowering the Board to authorise a director of the company to execute the transfer instrument on behalf of the expelled member. When the expelled member filed a petition for rectification of the register of members, the court examined two issues. One was whether the amended article after expulsion of a member could bind him and the second was whether the article could provide for execution of the transfer instrument by a person other than the member or his autho- rised representative and whether the same would be valid in terms of Section 34 of the Act. On both the issues, the court held in the negative. The Court observed:
"Section 34(3) of the Act provides that it shall not be lawful to register a trans- fer of shares unless a proper instrument of transfer duly stamped and executed by the transferor and the transferee has been delivered to the company. If the article purported to confer power on the directors to transfer shares in the absence of an instrument of transfer, it was clearly ultra vires of Section 34. The company could not authorise anyone to sign an instrument of transfer on its behalf. Since the peti- tioner never signed any instrument and no valid instruments were sent to the com- pany as the Companies Act requires, he never ceased to remain a member of the company inasmuch as he always remained as a shareholder".
Accordingly, the court order rectification of the register of members. The present case before us is practically similar and the decision of the High Court in the above case, therefore, could appropriately be applied in this case also.
14. Thus the transfer of shares being in contravention of the mandatory provision of Section 108 of the Act and consequent omission of the name of the petitioner in res- pect of the shares being without sufficient cause, we hereby direct the company to restore the name of the petitioner on the register of members in respect of the 350 shares and rectify the register within 30 days from the receipt of this order. Since the draft towards the consideration for the shares has not been encashed by the peti- tioner, she will return the same to the company, if not already done, and the same will be returned to the transferee of the shares to enable him to get the refund from the bank. We also award a cost of Rs. 2,500 in favour of the petitioner to be paid by the company within 30 days from the date of this order.