Company Law Board
Remanika Silks Pvt. Ltd. And Ors. vs J.C. Augustine And Ors. on 22 June, 1998
Equivalent citations: [2000]100COMPCAS464(CLB)
ORDER
1. This is a petition filed under Section 111 of the Companies Act, 1956 (hereinafter referred to as "the Act") by M/s. Remanika Silks (P.) Ltd. (hereinafter referred to as "the company") and two others, being director and member of the company for declaration that the transfer of 3,72,000 shares, bearing distinctive numbers 10,001 to 15,000, 2,80,001 to 6,42,500 and 7,92,501 to 7,97,000 in favour of the respondents is illegal and for removal of the names of the respondents from the share register of the company for the reasons stated in the petition.
2. The brief facts as stated in the petition and reiterated by C. M. Devan, counsel for the petitioners, in his oral submissions are that the first petitioner-company is a private limited company incorporated under the Act with authorised share capital of Rs. 1,00,00,000 consisting of 10,00,000 equity shares of Rs. 10 each. The company is engaged in the business of purchasing and selling silk sarees and other textiles. The company on its incorporation took over a partnership firm "Remanika Silks" including all assets and liabilities thereof. The second petitioner had extended financial assistance to the aforesaid partnership-firm carried on by respondents Nos. 1 and 2 and as on March 31, 1993, the partnership-firm owed a sum of Rs. 18,66,000 to the second petitioner, as borne out from the extract of the ledger account of Remanika Silks. The balance-sheet of M/s. Remanika Silks as on March 31, 1993, reinforces the amount due and payable to the second petitioner. The ledger account of Remanika Silks for the period from April 1, 1993 to March 31, 1994, discloses that a sum of Rs. 75,000 was due to the second petitioner by the said partnership-firm. On taking over of the assets and liabilities of the aforesaid partnership by the company the second petitioner was allotted shares of the company. The minutes of the board meeting held on October 25, 1993, will show that the shares were allotted to persons who had already subscribed for shares of the company. Accordingly, at the board meeting held on November 29, 1993, 6,67,000 shares were allotted to petitioners Nos. 2 and 3 out of the total shares of 7,77,000. The shareholding pattern at the time of incorporation of the company was as under :
Petitioners Nos. 2 and 367.20% Respondents Nos. 1 and 2 12 % Respondent No.3 0.5 % Unissued shares 20.30 %
3. At the meeting of the board of directors of the company held on March 8, 1994, respondents Nos. 2 and 4 were appointed as additional directors. At the said meeting it was further resolved to reallocate the shares of the company admitting new members in the following manner :
Petitioners Nos. 2 and 330 % Respondents Nos. 1 and 2 35 % Respondent No.3 10 % Respondent No.4 and his family members 25 %
4. Pursuant to the board resolution dated March 8, 1994, the second peti tioner under the honest belief had left with the first respondent signed blank transfer forms for the purpose of reallotment of shares. The first respondent had illegally and without authority transferred many of the shares belonging to petitioners Nos. 2 and 3 in favour of the respondents.
The transfers effected by virtue of mere blank transfer forms are illegal and ineffective. Moreover, the transfer is not supported by consideration.
This factor came to light only when the second petitioner was appointed as managing director of the company in the place of the first respondent at the extraordinary general meeting of the company held on January 30, 1997. The share money originally contributed by the second petitioner was appropriated by the company towards the overdrawings of the second petitioner, the fact of which is denied by the second petitioner and the capital account of the second petitioner was debited by the impugned transfer without his knowledge and consent, so as to make it appear that shares allotted to the petitioners at the time of incorporation were without consideration. As the share moneys were allegedly due from petitioners Nos. 2 and 3, the company, exercising the power of paramount lien over the impugned shares forfeited them, in violation of articles 29 to 31 of Schedule I, Table A of the Act. The company did not follow the procedure prescribed under articles 15 to 23 regarding the transfer of shares.
5. Shri C. M. Devan, counsel for the petitioners relied upon the following decisions in support of his above averments :
(i) John Tinson and Co. Pvt Ltd. v. Mrs. Surjeet Malhan [1997] 88 Comp Cas 750 (SC) to state that transfer of shares without consideration is void ;
(ii) Public Passenger Service Ltd. v. M. A Khadar [1966] 36 Comp Cas 1 (SC) to state that the forfeiture of shares could be considered in Section 111 proceedings.
6. According to respondents Nos. 1 to 3 and Shri Mathai M. Paikeday, senior advocate, Mr. Joe Joseph, advocate, for respondents Nos. 1 and 2, it was decided at the board meeting held on November 29, 1993, to allot shares in favour of promoters and their relatives who had contributed share money to the company. Petitioners Nos. 2 and 3 had applied for 5,12,500 and 1,54,500 shares, respectively, aggregating to 67.2 per cent. In the same meeting, the shares were allotted among others to respondents Nos. 2 and 3. The minutes of the board meeting held on November 29, 1993, does not reveal any payment made by petitioners Nos. 2 and 3 towards share money. Though it was further resolved to issue share certificates within three months of the board meeting, share certificates were not issued on account of non-payment of share money by petitioners Nos. 2 and 3. In view of this, it was agreed for reallocation of the allotted shares among the directors on the basis of their actual contribution. Accordingly, in the board meeting held on March 8, 1994, it was unanimously decided by the board of directors of the company to effect mutually the transfer of shares in tune with share capital contribution made by each member. Consequently, the entire share capital was reallocated by which petitioners Nos. 2 and 3 must hold 30 per cent. of the shares as against 67.2 per cent. and transfer the entire remaining shares by March 51, 1994. Accordingly, the board of directors at its meeting held on March 21, 1994, approved the transfer of impugned shares, which were initially allotted to the second and third petitioners and remained unpaid in the name of the respondents. The second petitioner, being a director, who was present at all the board meetings had given his full approval and authorisation for the transfer of impugned shares. As on March 31, 1994, the second and third petitioners each held 1,50,000 equity shares, for which they had contributed share money in favour of the company. The Registrar of Companies was intimated of the above position. This is reflected in the annual return filed by the company in the year 1994. The petitioners cannot challenge the validity of the transfer after a lapse of more than three years and the petition is barred by limitation. Moreover, the petitioners are seeking rectification of the share register on the ground that the transfer of impugned shares is not supported by consideration. The jurisdiction of the Company Law Board under Section 111(4) is a summary jurisdiction and the Company Law Board cannot decide complicated and disputed questions of fact. The dispute regarding non-payment of consideration cannot come under the purview of Section 111, but only under the Indian Contract Act for which necessary remedy lies in a civil court. The instruments of transfer were properly stamped in compliance with Sub-section (1) of Section 108 of the Act. The instruments of transfer were duly executed by the transferors as well as transferees in the prescribed form and in compliance with Rule 5A of the Companies (Central Government's) General Rules and Form, 1956. The requirements under articles 15 to 23 of the articles of association of the company were also complied with while effecting the transfer by petitioners Nos. 2 and 3. The impugned shares were duly transferred by petitioners Nos. 2 and 3 in favour of the respondents. The petitioners have not raised the plea of forfeiture of shares in the pleadings. The petitioners are questioning the procedure adopted by the company and not the fact of consideration paid by respondents Nos. 2 and 3 for the impugned shares. The ledger extract of Remanika Silks Private Limited for the period from April 1, 1993 to March 21, 1994, reveals the share capital of Rs. 15 lakhs each in the name of petitioners Nos. 2 and 3.
7. Counsel for the respondents relied on the following decisions in support of their submissions :
(i) Mathew Michael v. Teekoy Rubbers (India) Ltd. [1983] 54 Comp Cas 88 (Ker) to state that (headnote) "the courts have been reluctant to interfere with the decision of the directors in the matter of registering transfers, where the articles of association confer on them an absolute discretion, which is always presumed to have been exercised bona fide. Unless the articles otherwise provide, the directors are not bound to disclose their reasons, and the presumption would be displaced when a petitioner positively proves that a power has been used without bona fides and the directors have acted oppressively, capriciously or corruptly or in some way mala fide."
In the present case, articles 16 and 21 empower the board of directors of the company to approve the transfer of shares. The courts cannot, interfere with the discretion of the board of directors of the company."
(ii) Mukundlal Manchanda v. Prakash Roadlines Ltd. [1991] 72 Comp Cas 575 (Kar) to state that (headnote) "the petitioners had been present at the meeting permitting the transfers and had not protested at any earlier point of time showed that the petition had been filed only upon a change of attitude ; the petitioners were, therefore, not entitled to invoke the discretionary jurisdiction of the court under Section 155 of the Companies Act."
(iii) Dr. Hardit Singh Giani, Liquidator, The National Planners Ltd. (In Liquidation) v. Shri Ram Kumar [1964] 34 Comp Cas 402 (Punj) to state that (page 404) "applications for rectification of share register and for rectification of list of contributories filed by a member of the company after a delay of seven years ... is not maintainable".
In the present case, the petition has been filed after a lapse of more than three years and no explanation has been offered for the delay. The petitioners have misused the powers by invoking the provisions of Section 111.
8. According to the third respondent, it was unanimously decided by the board of directors at the meeting held on March 8, 1994, to reallocate the impugned shares. Accordingly, petitioners Nos. 2 and 3 executed the transfer deeds and handed them over to the company. The transferees paid the consideration for the impugned shares directly in favour of the company in accordance with the decision of the board taken on March 8, 1994.
9. We have considered the pleadings and arguments of counsel for the petitioners as well as respondents. On the basis of the pleadings as well as oral submissions the issue that arises for our consideration is whether the share register of the company shall be rectified cancelling the approval of the board of directors of the company for the transfer of impugned shares in favour of the respondents in the facts and circumstances of the case.
10. The undisputed facts are that in the board meeting held on November 29, 1993, 6,67,000 shares were allotted in favour of petitioners Nos. 2 and 3 aggregating to 67.2 per cent. and 1,10,000 shares in favour of respondents Nos. 1 and 2. The board of directors of the company had decided in the meeting held on March 8, 1991, to reallocate the shares in the following manner :
Petitioners Nos. 2 and 3-
30% Respondents Nos. 1 and 2
-
35% Respondent No.3
-
10% Respondent No.4 and his family
-
25 %
11. Petitioners Nos. 2 and 3 had transferred the impugned shares in favour of the respondents in accordance with the decision of the board taken on March 8, 1994. Petitioners Nos. 2 and 3 had delivered the blank transfer forms in respect of the impugned shares to the company. The fact in dispute is regarding the payment of consideration for the transfer of impugned shares. It is the contention of the respondents that petitioners Nos. 2 and 3 though originally got allotted 6,67,000 shares, they did not remit the allotment money for the impugned shares and consequently they were transferred to the respondents, in accordance with the board resolution dated March 8, 1994. It may be observed that the board of directors of the company had approved the transfer of the impugned shares effected by petitioners Nos. 2 and 3 in favour of the respondents in the meeting held on March 21, 1994. The second petitioner being a director of the company supported the resolution dated March 21, 1994, approving the transfer of impugned shares in favour of the respondents. The petition seeking rectification of the share register of the company has been filed on June 4, 1997 after a delay of three years and six months. In the circumstances, the respondents took a plea that the petition is barred by limitation.
12. Before going into the merits of the petition, it is rather relevant to consider the plea of the respondents whether the petition filed after a period of three years and six months of the approval of the board of directors transferring the impugned shares in favour of the respondents is barred by limitation. It is beyond doubt that Sub-section (4) of Section 111 does not prescribe any time-limit within which the Company Law Board shall be approached unlike under Sub-section (3) of Section 111, according to which, appeal shall be made within four months of the receipt of the notice of refusal or where no notice has been sent by a company within four months from the date on which the instrument was delivered. Moreover, the Company Law Board is not a court for the purposes of Limitation Act, 1963, which does not apply to the proceedings before the Company Law Board as has been held in a number of cases. The present petition would, neither therefore, be hit by limitation, under the Limitation Act, 1963, nor by Sub-section (4) of Section 111 of the Act, especially, when no time-limit is prescribed as observed supra. However, it is the admitted position that the petitioners approached the Company Law Board after a lapse of three years and six months. The explanation offered by the second petitioner that he came to know of the transfer on January 30, 1997, when he became the managing director of the company is not convincing, especially when he was a party to the resolution dated March 8, 1994, approving the transfer. Though counsel for the petitioners attempted to offer the explanation that the delay was on account of strike by the workers in the company and also problems created by the creditors, the same was not substantiated by means of any documentary proof. Though the petition suffers from laches, we do not dispose of the petition on mere technicalities. In the circumstances, we proceed further considering the merits of the petition.
13. It is free from doubt that at the board meeting held on November 29, 1993, 6,67,000 shares amounting to 67.2 per cent. were allotted to petitioners Nos. 2 and 3 and 1,10,000 shares constituting 12 per cent. in favour of respondents Nos. 1 and 2. Pursuant to the unanimous decision of the board taken on March 8, 1994, reallocating shares, petitioners Nos. 2 and 3 transferred the impugned shares in favour of respondents Nos. 1 and 2, which was approved by the board of directors in its meeting held on March 21, 1994. The second petitioner, being a director and party to the board resolution dated March 21, 1994, had given his approval for the transfer of impugned shares in favour of the respondents. This is reflected in the annual return filed by the company in the year 1994. The facts stated in the annual return are prima facie evidence of correct and complete facts as has been held in Rashmi Seth v. Chemon (India) Pvt. Ltd. [1992] 3 Comp LJ 89 ; [1995] 82 Comp Cas 563 (CLB). Moreover, the ledger extract of the company for the period from April 1, 1993 to March 31, 1994, discloses the share capital of Rs. 15 lakhs each in the name of petitioners Nos. 2 and 3. In the circumstances, we do not propose to go into the dispute regarding payment of consideration for the transfer of impugned shares, especially, when the second petitioner, being a director was one of the parties to the board resolution approving the transfer. Accordingly, without going into the merits of the various contentions raised by the parties in regard to the validity of the transfer of impugned shares and the case law cited on behalf of either of the parties, we dismiss the petition. However, petitioners Nos. 2 and 3 are at liberty to proceed in a civil court for any such claim, if so advised.
No order as to costs.