Company Law Board
K.S. Narayana Iyer vs Talayar Tea Co. Ltd. And Anr. on 30 September, 1994
Equivalent citations: [1995]83COMPCAS743(CLB)
ORDER
1. Shri K.S. Narayana Iyer (hereinafter referred to as "the petitioner") has filed an application in the form of a petition under Section 111(4) of the Companies Act, 1956 (hereinafter referred to as "the Act"), seeking rectification of the register of members of Talayar Tea Co. Ltd. (hereinafter referred to as "the company") in respect of 11,160 equity shares of Rs. 2 each (presently after consolidation, 2,232 equity shares of Rs. 10 each) for reasons stated in the petition.
2. The facts as alleged in the petition are that the petitioner entered into an agreement with the second respondent to purchase the impugned shares held by the second respondent in the company and executed a promissory note for Rs. 25,000 towards the payment of total consideration agreed between the parties. This promissory note was executed on July 1, 1973, and towards the same the petitioner paid a sum of Rs. 15,000 on November 10, 1974, to the second respondent. The petitioner had not taken possession of the shares but the shares were held by the second respondent as collateral security towards discharge of the promissory note. It was also agreed that all the dividends that may be declared in respect of the said shares would be credited towards discharging the promissory note liability. However, in spite of demands made by the petitioner, the second respondent did not send the share certificate to the petitioner nor did he take any steps to get the shares registered in the name of the petitioner. The second respondent being a director of the company in disregard of his fiduciary capacity, has failed to record the registration of transfer. In view of the failure of the second respondent to honour his commitment, the petitioner filed a civil suit in the court of the Subordinate Judge, Kottayam, in O. S. No. 155 of 1979 on June 28, 1979, praying for a declaration that the petitioner is the owner of the impugned shares and he also deposited the balance amount of Rs. 10,000 in the court on October 11, 1979. However, this suit was dismissed on the ground of limitation. As there is no period of limitation fixed for filing an application for rectification of register of members under Section 111(4) of the Act and as the cause of action is a continuing one the petitioner has filed the petition within a short period after the dismissal of the civil suit before the Company Law Board, the prayer for rectification be granted.
3. While the second respondent has filed a reply, the first respondent, viz., the company, has adopted the reply of the second respondent. According to the replies, the petition cannot be entertained in view of the fact that the matters complained of in the petition have already been finally decided by the civil suit in O. S. No. 115 of 1979. It is further stated in the reply that in view of the provisions of Article 137 of the Limitation Act, the petition has become time-barred and, therefore, does not merit any consideration. However, as far as the agreement to sell the shares, execution of promissory note, receipt of promissory note and receipt and payment of Rs. 15,000 etc., are concerned, they have not been denied by the second respondent.
4. We heard, at length, the arguments of Shri K. Jagdisachandran Nair, learned counsel for the petitioner and Shri K.N.V. Ramani, learned counsel for the respondents. Shri Nair argued at length to bring home the point that the sale of shares was completed on July 1, 1973, itself when the promissory note was executed for the agreed consideration. The moment the sale was completed the petitioner is entitled to ownership of the shares. Even though the shares were not handed over to the petitioner they were held only as collateral security towards discharge of promissory note and if at all the second respondent has any remedy it could be only with reference to the promissory note. He is not entitled to continue to maintain his membership in the company as sale of the shares had already taken place. The very fact that the second respondent had even agreed that the dividends that may be received would be credited to the promissory note account clearly establishes that, from the date of execution of promissory note, the title to the shares in fact, vested in the petitioner.
5. As far as the decision of the civil court, Kottayam, is concerned, Sri Nair argued that the civil court considered only the question relating to limitation and had not decided the issue on the merits. The remedy asked for in the civil court could not be granted by that court only due to the application of the law of limitation and as a matter of fact the relief tie is seeking before the Company Law Board (CLB), viz., rectification of the register of members could not have been granted by the civil court. He further stated that since the petitioner has acquired title to the shares his cause of action for rectification of the register of members is a continuing one and the question of any limitation to file this instant petition before the Company Law Board does not arise. Relying on Kerala State Electricity Board v. Kunhaliumma (T. P.), AIR 1977 SC 282 and Hukumdev Narain Yadav v. Lalit Narain Mishra, AIR 1974 SC 480, Mr. Nair submitted that the Companies Act being a code in itself wherein no period of limitation has been prescribed for application under Section 111(4), the provisions of Article 137 of the Limitation Act should not be applied. He further submitted that there was no delay or laches on the part of the petitioner in filing this petition inasmuch as the matter was before the civil court right from 1980 and the instant application was filed within a short period after the civil case was concluded. Therefore, this petition cannot be dismissed on the question of either limitation and/or laches. He further stated that the Company Law Board being a court of equity, should consider the entire matter on just and equitable grounds considering the fact that for nearly 20 years, the second respondent has been keeping Rs. 15,000 of the petitioner and he has also been enjoying the dividend received in respect of the impugned shares. Mr. Nair also argued that the only remedy available to the second respondent, in case he feels aggrieved about the nonpayment of the balance consideration of Rs. 10,000, is to exercise a right of lien on the shares as unpaid seller but cannot deny title to the shares of the petitioner especially when the shares were held only as collateral security. Accordingly, he prayed for a direction to the company to rectify the register of members by putting the name of the petitioner on the register in respect of the impugned shares.
6. Shri K.N.V. Ramani, learned counsel for the respondents, narrating the sequence of facts in the case, submitted that while the second respondent does not deny the fact of agreement to sell the impugned shares, execution of promissory note and receipt of Rs. 15,000 towards the promissory note, the petition suffers from various infirmities. The entire matter under dispute has already been finally decided by the Sub-Court, Kottayam, as well as the Kerala High Court and as such cannot be reagitated before the Company Law Board. According to him, the petitioner had two remedies open to him to enforce his title to the shares, viz., either through a civil suit or under the erstwhile Section 155 of the Act. Since the petitioner chose to avail of the first remedy in which he has failed, he cannot re-open the issue under the new Section 111 of the Act which has replaced the provisions of the earlier Section 155. He elaborately dealt with the principles of res judicata, the Sale of Goods Act and the Limitation Act, by citing various court decisions to argue that the petitioner cannot be given the relief he has sought for in this petition.
7. We have considered the written as well as the oral submissions made by the parties. This is a petition under Section 111(4) of the Act which relates to rectification of the register of members. The substantive issue in this case is regarding transfer of shares. Therefore, the only applicable provision of law would be Sub-section (4)(b) of Section 111 of the Act which speaks about default or unnecessary delay in entering in the register the fact of any person having become a member. To invoke this provision, one has to establish that the default or unnecessary delay has taken place in entering one's name in the register of members after he has become a member. According to the petitioner, when he executed the promissory note, the title to the shares had been passed on to him and, therefore, he is entitled to become a shareholder and the company has defaulted in entering his name.
8. As we have pointed out earlier, even though this petition is for rectification of the register of members, the substantive issue is regarding transfer of shares. A company takes cognisance of any transfer only when a proper instrument of transfer along with share certificates is lodged with the company following the provisions of Section 108 of the Act. In the present case, it is an admitted fact that no transfer instruments were executed. The petitioner has impleaded the company also as a party alleging that it has knowledge of the impugned transfer as the second respondent is the managing director of the company. Mr. Nair, relying on the decision of the Kerala High Court in Antony (K.P.) v. Thandiyode Plantations Pvt. Ltd. [1987] 62 Comp Cas 553 (Ker) submitted that the company court has exclusive jurisdiction in respect of rectification of the register of members and, therefore, it can decide on title to shares and once the tile is established the court can direct the parties to execute the necessary transfer deeds for effecting rectification.
9. Therefdre, from the facts of the case, it is clear that for the purpose of ordering rectification of the register of members, first we have to decide the petitioner's title to the shares. For this purpose, it is relevant to look into the proceedings before the civil court and also the judgment of the Kerala High Court in the same proceedings.
10. The reliefs sought for in the civil suit before the learned Subordinate Judge, Kottayam, were (i) a declaration that the petitioner was the owner of the impugned shares ; (ii) for a direction to the company to effect, by way of an order of mandatory injunction, a change in the books of account in the company regarding the ownership of the said shares and (iii) an order of mandatory injunction to register the transfer of shares in the register of members of the company. In other words, the civil court was to decide on title to the shares and give a direction regarding rectification of the register of members. When the sub-court dismissed the suit for want of jurisdiction the matter went in appeal to the Kerala High Court which remanded the case to the civil court to decide the case on the merits after taking a decision on the issue relating to limitation. While remanding the case, the Kerala High Court observed :
"... these recitals are insufficient to constitute a transfer of the shares in the name of the plaintiff. The document, exhibit A-1, itself recites that shares would be transferred only on payment of the amount due on the promissory note and not before that. It is also not disputed that for transfer of shares certain formalities have to be complied with under the Companies Act. Nobody has got a case that such formalities have been complied with in this case ..."
11. Further, the Kerala High Court observed :
"As there was no transfer of shares, the plaintiff was not entitled to a declaration that he is the owner of the shares."
12. The Kerala High Court also observed :
"If the court below finds that the contract still subsists and the enforcement was not barred by limitation, a decree can be granted in favour of the plaintiff directing the first defendant to perform his part of the contract by taking necessary steps to transfer the shares to the plaintiff on receipt of the balance of consideration."
13. On remand of the case, the Sub-Court, Kottayam, after elaborately dealing with the question of limitation, came to the conclusion that the relief of mandatory injunction regarding ownership of the impugned shares cannot be granted as the same is barred by limitation.
14. From these two decisions, it is clear that competent civil courts of law have held that the petitioner has not acquired title to the shares. According to Shri Nair, this finding was based on the application of the law of limitation, and since there is no limitation period prescribed in the Companies Act for filing a petition under Section 111(4), the Company Law Board could examine this issue afresh. We are afraid, the contention of Shri Nair cannot be accepted. Even assuming that there is no period of limitation for petition under Section 111(4), such argument can be considered only for rectification if the petitioner otherwise establishes that he has title to the shares. In the present case, as contended by Shri Nair himself, first we have to decide on the issue of the title to shares. A person acquires title to shares either by allotment, transfer or by transmission. In the present case, since it is on the basis of transfer of shares which is a contract between two parties, whatever period of limitation is provided for completion of a contract, the same will have to be applied. The civil court has already held that the enforcement of the contract has become time-barred. Such a finding has already been given by a competent court of law and it will not be proper for us at this point of time to reopen the issue. The right course of action for the petitioner should have been, if he felt aggrieved by the decision of the civil court to go in for an appeal which he has not done and as such the finding of the civil court has become finally binding on him.
15. Under these circumstances, in view of the fact that the petitioner does not hold any title to the shares, we are unable to order rectification of the register of members and enter the name of the petitioner in the register of members. Accordingly, we dismiss this petition. No order as to costs.