Company Law Board
Satyanarayana Rathi vs Annamalaiar Textiles Pvt. Ltd. And Ors. on 3 June, 1998
Equivalent citations: [1999]95COMPCAS386(CLB)
ORDER
1. This is an appeal filed under Section 111(2) and (3) of the Companies Act, 1956 (hereinafter referred to as "the Act"), in the matter of Annamalaiar Textiles Private Limited (hereinafter referred to as "the company") and eight others, being directors of the company to register 13,011 equity shares of the company comprised in share certificates as per details set out in the appeal in the name of the appellant by deleting the names of the second, third and ninth respondents. Respondents Nos. 10 and 11 holding together 1,686 shares of the company have been impleaded at their instance as parties to the proceedings.
2. According to the appellant, he is carrying on the business of cotton dealer and supplier in the name of different firms and supplying cotton to various mills. The appellant supplied cotton from time to time to the companies, Seetha Venkatesh Mills Limited, Sri Murugan Mills Private Limited and Arunachaleswarar Mills, which are in the control of respondents Nos. 2, 3, 6, 7 and 8, on the security, among other things, of the impugned shares held in the names of respondents Nos. 2, 3 and 9 who had delivered the share certificates together with the transfer deeds to secure the dues. In spite of repeated demands as well as lawyer's notices these entities failed to settle the outstanding amount, due to the appellant's firms. Consequently, the appellant forwarded the impugned shares together with the transfer deeds to the company in August, 1994, for effecting the transfer in his favour. However, the company had failed to effect the transfer in favour of the appellant on the ground that the transfer of shares was ultra vires the articles of association of the company. The company had neither effected the transfer nor returned the original share certificates. Hence, the appeal.
3. According to respondents Nos. 1 to 3 and 6 to 9, the appeal was preferred on behalf of Bankat Lal Mothilal Rathi and Co., and Sathyanara-yana Rathi and Co., by the appellant. The appellant has not produced any authorisation empowering him to represent the said firms. Seetha Venkatesh Mills Limited, Sri Murugan Mills Private Limited and Arunachaleswarar Mills are necessary parties to the proceedings. The second respondent did not buy cotton for Sri Murugan Mills Private Limited as well as Arunachaleswarar Mills. Moreover, the second respondent is neither a director nor a shareholder nor a partner in the said entities and not in any way concerned with the transactions. Respondents Nos. 2, 3 and 9 were constrained at the instance of the appellant to offer the impugned shares by way of security for the cotton supplied by the appellant's firms. The cotton supplied by the appellant's firms was of very poor quality resulting in poor production with inferior quality, heavy loss and increase of liability. The transfer of the impugned shares as sought by the appellant is in violation of Articles 3, 14 and 15 of the articles of association of the company. The matter relating to the transfer of the impugned shares came up for consideration in the board meeting held on September 30, 1994. Respondents Nos. 4 and 5 raised certain issues regarding the transfer, upon which the chairman placed the legal opinion of the company's advocate. The board after discussions had resolved rejecting the transfer of impugned shares, as the same was ultra vires the Act, as well as the articles of association of the company. The Company Law Board is not the appropriate forum to seek any redressal for non-payment of the dues. According to respondents Nos. 4 and 5, they were not parties to the said resolution passed on September 30, 1994. According to respondents Nos. 10 and 11, they are willing to purchase the impugned shares in exercise of their pre-emptive right and in accordance with Article 15 of the articles of association of the company.
4. Shri V. S. Subramaniam, senior counsel for the appellant, while reiterating the averments made in the memorandum of appeal submitted that the impugned shares representing the controlling interest account for 52 per cent, of paid-up capital of the company, He drew our attention to the letter dated June 11, 1994 (annexure A-4), of respondents Nos. 2, 3 and 9 stating categorically that in the event of not clearing the dues of the appellant within 45 days, the appellant is at full liberty to get the impugned shares transferred in such manner as the appellant may deem fit and further ensured the smooth transfer of shares. Consequent upon failure on the part of the company to clear the dues the appellant had forwarded the share certificates in respect of the impugned shares together with the transfer deeds to the company by letter dated August 2, 1994 (annexure A-6), for effecting the transfer. The company by letter dated September 8, 1994 (annexure A-8), assured the appellant that the transfer forms and share certificates would be placed at the meeting of the board for necessary action. However, the company, contrary to its assurance, conveyed the refusal of its board of directors at its meeting held on September 30, 1994, to register the transfer of the impugned shares by letter dated August 1, 1994 (annexure A-10), as the same was ultra vires the articles of association of the company. According to Article 15, no share shall be transferred to an outsider if any member of the company is willing to purchase the same at the fair price which shall be determined by the directors. Article 16 prescribes the procedure which shall be adopted in the case of any member proposing to transfer shares. Though the appellant in exercise of his right as a pledgee opted for transfer of the impugned shares for a consideration of Rs. 1,95,06,500 paying the requisite stamp duty, the company neither effected the transfer nor returned the transfer deeds. Respondents Nos. 2, 3 and 9 and directors of the company deliberately failed to follow articles 15 and 16. The dues are neither settled by the company. These acts reveal the mala fide intention of the company. When the matter relating to the transfer of shares was considered in the board meeting held on September 30, 1994, among other directors, respondents Nos. 2, 3, 6 to 8 being the husband, wife and sons attended the meeting and refused the transfer, which is not bona fide. In the circumstances, Shri Subramaniam submitted that the company may either be directed to transfer the impugned shares in favour of the appellant or ensure compliance with Article 16 by respondents Nos. 2, 3 and 9, safeguarding the interest of the appellant.
5. Shri Arvind P. Datar, while reiterating the submissions made in the counter-statement on behalf of respondents Nos. 1 to 3 and 6 to 9, submitted that the appellant's firms have supplied cotton to the company as well as its sister concerns as borne out by several agreements (annexure-A-2) and that the impugned share certificates were pledged to secure the outstanding amount due to the appellant from the company and its sister concerns. The cotton supplied by the appellant was rather inferior in quality, which not only affected the quality of yarn but also the business of the company resulting in huge outstandings. The appellant thus committed breach of contract, for which he is not entitled to invoke the provisions of Section 111. The disputed and complicated questions of facts between parties regarding contractual obligations cannot be adjudicated before the Company Law Board, but in a civil court. This proposition has been well propounded by the Company Law Board in the following cases :
(a) Smt. Kamla Devi Mantri v. Grasim Industries Ltd. [19901 69 Comp Cas 188 (MP).
(b) Mahendra Kumar Jain v. Federal Chemical Works Ltd. [1965] 35 Comp Cas 651 (All).
(c) Ammonia Supplies Corporation Private Ltd. v. Modern Plastic Containers Pvt. Ltd. [1994] 79 Comp Cas 163 (Delhi) [FB].
(d) Dr. G. N. Byra Reddy v. Arathi Cine Enterprises Pvt. Ltd. [1997] 89 Comp Cas 745 (CLB).
6. Section 82 of the Act provides that the shares or other interest of any member in a company shall be movable property transferable in the manner provided by the articles of the company. By virtue of Article 3(a) of the articles of association of the company, the transfer of shares in the company is restricted in the manner specified in articles 14 to 19. Article 15 gives a presumptive right in favour of members before transferring any share to outsiders. Neither respondents Nos. 2, 3 and 9 gave any sale notice as required under Article 16 nor the company complied with articles 15, 16, 19 and 20. In the circumstances, the board of directors in its meeting held on September 30, 1994, refused to transfer the impugned shares in favour of the appellant acting upon the legal opinion dated April 29, 1994, of the company's advocate. The company cannot transfer the impugned shares in violation of the articles and such transfer is liable to be set aside, as laid down in Cruickshank Co. Ltd. v. Stridewell Leather Pvt. Ltd. [1996] 86 Comp Cas 439 (CLB). It is in these circumstances, Shri Datar, submitted that the company's refusal to transfer the impugned shares in favour of the appellant cannot be challenged.
7. With regard to increase of the paid-up capital and allotment of 48,512 equity shares, of Rs. 100 each in spite of the restraint order dated December 7, 1994, of the Company Law Board, Shri Datar, while apologising submitted that by oversight the said order was not communicated to the company, for which the company will abide by the orders of the Company Law Board.
8. Shri P. L. Narayanan, counsel for respondents Nos. 4 and 5, submitted that these respondents are ready and willing to purchase the impugned shares at the fair price which may be determined by the company in accordance with the articles of association of the company. Shri Sai Chandravadhan, counsel for respondents Nos. 10 and 11 while expressing their willingness to purchase the shares, adopted the arguments advanced on behalf of the other respondents.
9. We have considered the pleadings and arguments of counsel for the appellant as well as respondents. On the basis of the pleadings and oral submissions of counsel the issue that arises for our consideration is whether the company is entitled to refuse the transfer of the impugned shares in favour of the appellant in the facts and circumstances of the case.
The undisputed facts are as follows :
The impugned shares were pledged by respondents Nos. 2, 3 and 9 in favour of the appellant for the dues of the company and its sister concerns for supply of cotton. The dues remained outstanding. The appellant had delivered the original share certificates together with the instruments of transfer in respect of the impugned shares to the company on August 2, 1994, to effect the transfer in the name of the appellant. The company had assured to transfer the impugned shares in favour of the appellant. Respondents Nos. 2, 3 and 9 had not given any sale notice in writing to the company in compliance with Article 16. The company had neither determined the fair value of the impugned shares nor complied with articles 17 to 19. In the circumstances, the directors of the company refused the transfer of shares in favour of the appellant.
10. Section 82 of the Act provides that the shares or other interest of any member in a company shall be movable property, transferable in the manner provided by the articles of the company. By virtue of Article 3(a) of the articles of association of the company the transfer of shares in the company is restricted in the manner as specified in the articles. Articles 15 to 19, being relevant for our consideration read as follows :
"Article 15 : Save as otherwise provided in these articles, no share shall be transferred to any person who is not already a member of the company so long as any member of the company is willing to purchase the same at the fair price which shall be determined by directors from time to time.
Article 16 : In order to ascertain whether any member is willing to purchase a share at the fair value, the person proposing to transfer the same (hereinafter described as the transferor) shall give notice in writing (hereinafter called the 'sale notice') to the company that he desires to sell the same. Every sale notice shall specify the denoting number of shares which the transferor offers for sale and the fair value thereof shall be determined by the directors of the company, provided that where there is a bona fide purchaser outside the members of the company who has made a binding offer to pay for the shares at a specified price, the price fixed by the directors of the company as the fair value of the shares shall not be less than the price so offered. No sale notice shall be withdrawn except with the sanction of the directors of the company.
Article 17 : The directors of the company shall within twenty eight days after the service of a sale notice find a member willing to purchase the shares comprised therein (hereinafter described "the purchasing member") and shall give notice thereof to the transferor ; the transferor shall be bound upon payment of the value, to transfer the shares to such purchasing member who shall be bound to complete the purchase within seven days from the service of such notice.
Article 18 : In the event of the transferor failing to carry out the sale of any shares which he shall become bound to transfer as aforesaid, the directors of the company may execute a transfer in his name and may give a good receipt for the purchase price of such shares and may register the purchasing member as holder thereof and issue to him a certificate for the same and thereupon the purchasing member shall become indefeasibly entitled thereto. The transferor, in such case, shall be bound to deliver up his certificate for the same shares and on such delivery shall be entitled to receive the said purchase price without interest and if the certificate shall comprise any shares which he was not become bound to transfer as aforesaid, the directors shall issue to him a certificate for such shares.
Article 19 : If the directors cannot, within twenty-eight days after service of a sale notice, find a member of the company willing to purchase all or any of the shares comprised therein give notice accordingly, or if through no default of the transferor, the purchase of any shares in respect of which such last mentioned notice shall be given, shall not be completed within twenty-one days from service of such notice, the transferor shall at any time within six months thereafter be at liberty, subject to Article 20 hereof, to sell and transfer the shares comprised in his sale notice (or such of them as shall not have been sold to the purchasing member) to any person and at a price not less than that determined by the directors of the company to be the fair value."
11. A close scrutiny of the above articles will show that no share shall be transferred to an outsider if any member of the company is willing to purchase the same at the fair price which shall be determined by the directors. Further, transfer to an outsider is permissible only when the board is unable to find a willing member to purchase the shares within a stipulated period. We have on record affidavits from respondents Nos. 10 and 11 and oral submissions of counsel on behalf of respondents Nos. 4 and 5 expressing their willingness to purchase the shares at the fair price in exercise of their pre-emptive right. This being the case, the question of registering the shares in the name of the appellant does not arise.
12. Any transfer of shares of a company shall be in strict compliance with the articles of association, failing which the transfer will be violative of the provisions of articles and such transfer is liable to be set aside, as decided in Cruickshank Co. Ltd. v. Stridewell Leather Pvt. Ltd. [1996] 86 Comp Cas 439 (CLB). In the present case, the prayer of the petitioner to register the shares in his name is against the provisions of the articles. The company is, therefore, bound to refuse the transfer of shares in favour of the appellant, which it did. Accordingly, the appeal must fail. Perhaps, the appellant did not take steps to go through the provisions of the articles relating to transfer of shares, when he accepted the shares as pledge.
13. With regard to the increase of the paid up capital of the company and allotment of additional shares in spite of our order dated December 7, 1994, Shri Datar was apologetic that it had happened due to his failure to communicate our order to the company, and, therefore, the company had no knowledge of our order. He tendered his apology which we accept. Since the company had no knowledge of our order, we do not consider that it had violated our order and as such we do not propose to set aside the action of the company to increase its capital and allotment of shares.
14. A copy of this order may be sent to the Registrar of Companies, Tamilnadu at Chennai, drawing his attention to para. 14 of this order.
15. With the above directions, the appeal stands disposed of.
No order as to costs.