Company Law Board
V. Ramesh Kumar And Ors. vs Shanthini Jayakrishnan And Ors. on 7 March, 2007
Equivalent citations: [2008]141COMPCAS915(CLB), [2007]79SCL520(CLB)
ORDER
K.K. Balu, Vice-Chairman
1. The petitioners collectively holding 17% of the issued share capital of M/s Milka Industries Private Limited ("the Company") aggrieved on account of a series of alleged acts of oppression and mismanagement in the affairs of the Company, namely, (a) non-sending of notice of the board meetings to the first petitioner; (b) improper conduct of the board meetings; (c) illegal appointment of the respondents 2 to 7 as additional directors; (d) illegal appointment of the first respondent as managing director of the Company; (e) illegal interference of the respondents 1, 4, 5 & 6 in the day-to-day affairs and operations of the Company; (f) illegal acquisition of a large number of shares in the name of first respondent and her associates from the respondents 9 to 29 in violation of the relevant articles of association of the Company and Section 108 of the Act; and (g) abuse of fiduciary position by the first respondent by illegal transfer of shares and improper reconstitution of the board to usurp control over the Company, have invoked the equitable jurisdiction of the CLB under Sections 397 and 398 of the Companies Act, 1956 ("the Act"), seeking the following reliefs:
(i) to rectify the register of members of the Company by substituting the names of the petitioners in the place of respondents 9 to 29, on payment of fair value of the shares;
(ii) to declare that the appointment of respondents 2 to 7 as directors of the Company is illegal and void ab-initio;
(iii) to declare that the appointment of first respondent as managing director of the Company is illegal and void ab-initio; and
(iv) to reconstitute the board of directors of the Company by election of directors afresh by the general body of members.
2. Shri R. Vidhya Shankar, learned Counsel, while initiating his arguments submitted:
• The second petitioner and ninth respondent promoted the Company in July 1998, and is engaged in the business of manufacturing bread, bun and related items. The Company commenced commercial production in October 2000. The registered office originally located at Erode, came to be subsequently shifted to Old Mahabalipuram Road, Kancheepuram District. The petitioners group held, out of the total paid up share capital of the Company, 7350 equity shares, while the first respondent group was holding 3750 equity shares and the remaining shares were held by the ninth respondent group, dealers, business associates, etc. The Company was initially managed by the two original promoters, who however, later opted to resign from the board, to concentrate their efforts in other companies, upon which the first petitioner, belonging to second petitioner group, was appointed as managing director of the Company with effect from 02.07.2001. The first respondent appointed as director in March 2002, being house wife and other directors, residents of Erode District never involved in the management of the Company. All the powers of management since the beginning were vested only in the first petitioner and no other shareholder or director was in any way involved in the day-today operations of the Company, as borne out by affidavits filed by some of the employees of the Company.
• At the board meeting reportedly held at the registered office on 31.07.2003, (a) the first respondent was appointed as managing director to look after the day-to-day affairs and operate the bank account of the Company; and (b) the first petitioner was authorized to look after only marketing activities of the Company. Accordingly, the first respondent by a communication dated 15.09.2003 advised the Company's banker, namely South Indian Bank, Chennai-600 004. However, no such board meeting was held at the registered office and none of the directors was present at the alleged meeting of board of directors of the Company, as claimed by the first respondent and no notice of the board meeting was either served on the first petitioner. The first respondent further advised various suppliers not to supply materials on credit to the Company, which is neither bonafide nor in the interest of the Company.
• At various purported board meetings, all the directors other than the first petitioner and first respondent resigned from the post of directors and respondents 2 & 3, who are children of the first respondent, being college students and respondents 4 to 7 came to be appointed as additional directors, with a view to usurp control of the board of the Company, without notice of the board meetings to the first petitioner and none of the petitioners was taken into confidence in the matter of appointment of additional directors and no one director moved out of Erode District on any of the dates of alleged board meetings. The minutes of various board meetings recording leave of absence to the first petitioner is an evidence of the camouflaged meetings. If notice of the board meeting is not sent to a single director, the entire proceedings of the board meeting are vitiated. It was held in (a) Akbarali A. Kalvert and Anr. v. Konkan Chemicals Private Limited and Ors. (1997) Vol. 88 CC 245 that (a) the company shall give notice of board/general meetings to directors/members so long us they continue to remain so; and (b) certificates of posting are not reliable since it is too well known that certificates of postings can be got hold of without actually putting the letters in the post; (b) Sikkim Bank Limited and Ors. v. R.S. Chowdhury and Ors. (2000) Vol. 102 CC 387 that any board meeting held without any notice and/or unreasonably short notice to the directors is bad and invalid and that the decision taken at such board meeting is invalid; (c) Parmeshwari Prasad Gupta (deed., through legal representatives) v. Union of India (1974) Vol.44 CC 41 that any board meeting convened without notice to one director is not valid and that resolutions passed at such meeting is inoperative; and (d) Kamal Kumar Dutta and Anr. v. Ruby General Hospital Limited and Ors. (2006) 5 Comp LJ 511 that if the board meeting has been convened without proper service of notice on the directors, such board meeting cannot be said to be valid. Article 31 contemplates qualification shares as a pre-requisite for appointment as director and therefore, appointment of the respondents 2 & 3, being outsiders as additional directors contrary to Article 31 is not valid in law.
• The Companies being private limited Companies have restrictions on the transfer of shares as contained in Clauses 17 to 25 of the articles of association. It was held in John Tinson and Company Private Limited and Ors. v. Mrs. Surjeet Malhan and Anr. (1997) Vol. 88 CC 750 that (a) the articles of association of a private company are a contract between the parties; (b) when the articles provide that "no transfer of any share in the capital of the company shall be made or registered without the previous sanction of the directors..." then previous sanction shall be obtained from the directors for transfer of the shares held by the members, which connotes that there should be a written resolution accepting the transfer from the transferor to the transferee and such previous sanction should precede the handing over of the shares. This legal position has been followed by this board in Radhe Shyam Tulsian and Ors. v. Panchmukhy Investments Limited and Ors. (2003) Vol. 113 CC 298. Clause 18 of the articles stipulates that "No member shall be entitled to transfer the shares in the company except with the previous sanction of the Board of Directors", which has not been satisfied in the present case. Article 18 does not permit any negotiated transfer as between members on their own or at the wish of any shareholder. A shareholder on deciding to transfer his shares loses the right to choose any transferee of his choice. Furthermore, no member is entitled to claim the rights of a transferee. Clauses 19 to 22 contain pre-emption rights in favour of the existing members whenever shares are proposed to be transferred to non-members. By virtue of Clause 19, shares can be sold to outsiders, when the existing members are not willing to purchase the shares. The transferor, under Article 20, must give notice to the Company of the intended sale of his shares, upon which, the Company becomes the agent who shall conclude and effect the transfer of shares. Before execution of the instruments of transfer as envisaged in Article 22, the requirements of Articles 18 & 21 should be complied with. Therefore, the board is placed in a fiduciary position to act in a fair, transparent and bonafide manner in ascertaining a willing transferee. This would require due intimation in favour of all the members, of the notice received from the transferor-member and pro-rata distribution of the transfer of shares among them who are evincing interest to purchase shares, at a mutually agreed value. No notice was sent to the first petitioner for the board meetings approving the impugned transfer of shares. The transfer of shares from the existing shareholders in favour of respondents 2 to 5, being non-members and without giving any option to the existing shareholders as per Article 19 is not valid. In the absence of any valid transfer of shares to the respondents 2 to 5 and in the absence of their holding qualification shares as contemplated in Article 31, their appointment as additional directors is not valid and their presence can neither be counted for quorum in respect of any of the board meetings. Consequently, the transfer of shares and appointment of additional directors cannot be valid and are void ab-initio, especially when the first respondent alone cannot constitute a valid quorum for the board meetings. Furthermore, the first respondent and her two children themselves constituting the board had transferred the impugned shares to themselves in breach of their fiduciary duty. There can be nothing more perverse, inequitable and oppressive. The Company has not chosen to produce any material establishing compliance with the relevant articles or proof of consideration before effecting the impugned transfer of shares in favour of the first respondent and her family members. If a party withholds important documents in his possession, which can throw light on the facts at issue, the CLB may draw adverse inference even if the burden of proof does not lie on such party, as held in A.J. Coelho and Ors. v. South India Tea and Coffee Estates Limited and Ors. (2004) 5 Comp LJ 624. While the petitioners along with ninth respondent group always constituted the majority, first respondent group remained to be minority shareholders. The first respondent acquired, in breach of the relevant articles, shares from respondents 9 to 29 in her and/or her associates names of whom many are outsiders and further got registered such transfers at camouflaged board meetings, without giving any offer to the petitioners to purchase the whole or any part of those shares, and without notice to the first petitioner, who is a director. The impugned transfers have the effect of converting the existing minority of the first respondent group with a mere 3750 equity shares into an absolute majority. The first respondent and her family members constituting the board approved the impugned transfers to themselves at the board meeting held on 25.08.2003, which can be nothing more than oppressive. This Board in (a) S. Varadarajan and Anr. v. Udhayem Leasings and Investments Private Limited (2005) Vol. 125 CC 853 held that any transfer of shares without exhausting the rights of pre-emption in violation of the articles amounts to oppression; and (b) MM. Dua and Ors. v. Indian Dairy and Allied Services Private Limited and Ors. (1996) Vol. 86 CC 658 that where there is a provision in the articles of association of a company for pre-emption by members in the matter of transfer of shares, a transfer in violation of such provisions constitutes oppression; and (c) Akbarali A. Kalvert and Anr. v. Kopnkan Chemicals Private Limited and Ors. (1997) Vol. 88 CC 245 that any transfer of shares in violation of the articles amounts to denying a privilege available to the shareholder. The fiduciary position of the board has been grossly abused by the first respondent in fabricating the transfer of shares and in creating a majority for her group. The Supreme Court held in (a) Dale and Carrington Investment Private Limited and Anr. v. P.K. Prathapan and Ors. (2004) Vol. 122 CC 161 that the directors act on behalf of a company in a fiduciary capacity and their acts and deeds have to be exercised for benefit of the company in accordance with the memorandum and articles of association of the company with utmost good faith, utmost care and skill and due diligence and in the interest of the company they represent; and (b) Vaishnav Shorilal Puri and Ors. v. Kishore Kundanlal Sippy and Ors. (2005) 1 Comp LJ 407 that any person bound in a fiduciary character to protect the interests of another person should not put himself in a position where his interest and duty conflict. If by availing himself of this fiduciary character or by entering into any dealings under circumstances in which his interests are or may be adverse to those of such other person he gains for himself a pecuniary advantage, he must hold for the benefit of such other person the advantage so gained; and (c) Kamal Kumar Dutta and Anr. v. Ruby General Hospital Limited and Ors. (2006) 5 Comp LJ 511 that the directors are in a position of a trust and must conform to the probity and their conduct should be above suspicion.
• The first respondent has brought out material changes both in terms of shareholding and management by means of reconstituting the board with her own associates, with an ulterior motive to oust the petitioners, who have been having effective control of the Company all these years, thereby its affairs are being conducted in a manner prejudicial to the interest of the Company and its shareholders. This Board in S. James Fredrick and Anr. v. Mrs. Minnie R. Fredrick and Ors. (2000) 1 Comp LJ293 held that appointment of additional directors disturbing parity in the constitution of board of directors of a family company would constitute an act of oppression; and (b) Kshounish Chowdhury and Ors. v. Kero Rajendera Monolithics Limited and Ors. (2002) I Comp LJ 552 that appointment of additional directors made to gain control of the board is neither bonafide nor in the interest of the Company. The Company being a private limited company and managed on quasi partnership principles, it is rather unjustifiable for a single shareholder to resort to a series of oppressive acts in order to ta ke control and management of the Company in gross violation of the articles of association of the Company. The respondents, being oppressors should not be awarded as observed by the Supreme Court in Dale and Carrington Investment Private Limited v. P.K. Prathapan (supra) especially when, it would amount to granting premium in favour of the oppressors. The transferors having evinced interest to transfer impugned shares, this Bench may consider directing the transferors to transfer the impugned shares proportionately to all the members in the ratio of their original shareholding, by which the transferors are in no way affected as observed by this Board in M.M. Dua and Ors. v. Indian Dairy and Allied Services Private Limited and Ors. (supra).
• The board resolution dated 07.07.2003 indicates that duplicate share certificates were issued on request by the respondents 9 & 10 in respect of their shares, whereas the board resolution dated 31.07.2003 approving share transfer contains details of the original share certificate numbers, establishing the apparent illegality and irregularity in effecting the transfer of shares held by the respondents 9 & 10. The transfer deeds bear the stamp of the Registrar of Companies, Coimbalore, as 19.08.2003, whereas the transfer deeds are found to be executed on 19.08.2003 and filed on the very same date. Therefore, the transfers are in clear violation of the mandatory provisions of Section 108 of the Act. If the mandatory requirements of Section 108 of the Companies Act, 1956, are not complied with, while registering the transfer of shares, the transfer is not valid, as held in Shailesh Rajnikant Parekh v. Starline Travels Private Limited and Ors. (2004) Vol. 118 CC 147.
• The statutory records are with the first respondent's husband, as borne out by the communication dated 11.08.2003 of the Company requesting the former to return the books of account and other statutory records. The first petitioner by his communication dated 24.09.2003 refuting the appointment of first respondent as managing director and expressing concern on stoppage of raw materials by the suppliers at the instance of the first respondent, sought to convene an extra ordinary general meeting of the Company to sort out the contentious issues, which was ignored by the first respondent. The fourth respondent has been appointed as general manager of the Company to take charge of the factory premises only with the object of interfering with the day-to-day operations carried out by the first petitioner.
• The Company had earlier availed IFST interest free loan from Government of Tamilnadu to facilitate the sales tax collected from the customers to be utilized as an interest free loan by the Company and to be repaid in a structured manner after a long initial moratorium. Nevertheless, the first respondent pre-closed the IFST loan secured by the Company, with the intention to strangulate the finances of the Company, causing great hardship and prejudice to the Company.
• The actions complained of in the company petition are harsh, unconscionable and oppressive to the petitioner which would justify the making of winding up order of the Company under the just and equitable clause. However, such winding up would unfairly prejudice the interests of the petitioners and the minority shareholders.
3. Shri P.H. Arvind Pandian, learned Counsel, appearing for the respondents opposed the company petition on the following, among other grounds:
• At the board meeting held on 31.07.2003, after due notice to the first petitioner, first respondent was appointed as managing director to operate the bank account of the Company. The petitioners have never complained of the alleged irregularities in the appointment of the first respondent as managing director, at any prior point of time, despite notifying such appointment by filing Form 32 with the Registrar of Companies as early as on 27.08.2003.
• The appointment of children of the first respondent cannot be challenged as violative of Article 31, especially when, a person under that article even after becoming a director can acquire the qualification shares within two months from the date of his appointment. There is no prohibition to appoint relatives of a director as directors of the Company and therefore, the respondents 2 and 3 do not suffer any legal disability in becoming directors of the Company. The appointment of first respondent's children as directors of the Company is neither a contract nor an arrangement attracting the provisions of Section 299/300 of the Act, 1956, in which case, the question of disinterested quorum does not arise and particularly Section 300 does not apply to the Company under Section 300(2)(a) of the Companies Act, 1956 being a private limited company and neither a subsidiary nor a holding company of a public company. There is no age limit fixed for the appointment of directors and hence the appointment of the first respondent's children docs not become invalid on account of the fact that they are college students.
• The directors who had resigned from the post of directors attended the board meetings from time to time and particularly the board meeting held on 31.07.2003, as borne out by an extract of the attendance register maintained by the Company. Furthermore, there is no denial of such fact from those directors and therefore, the allegation of the petitioners that none of the directors moved out of Erode District on the date of the alleged board meetings held at the registered office of the Company is not sustainable.
• The board meeting of 30.10.2003 was convened at the registered office under chairmanship of the first respondent in terms of the relevant minutes of the board meeting, which belies the stand of the petitioners that the board meeting held on 30.10.2003 was attended by the first respondent's husband as a proxy to the first respondent. Thus, it is the first respondent who attended the board meeting on 30.10.2003 and not by her husband as contended by the petitioners. The other directors were duly appointed at the board meeting held on 30.10.2003, which cannot be questioned at this belated stage. The first petitioner even though a shareholder of the Company has made all the allegations in his directorial capacity, which are not amenable to the jurisdiction of the CLB. In this connection reliance has been placed on Hillerest Realty SDN. BHD. and Anr. v. Hotel Queen Road Private Limited and Ors. (2006) Vol. 133 CC 742 to show that (a) when a member alleges oppression, he has to specifically plead on five facts: what is the alleged act of oppression, how it is oppressive, who committed the act of oppression, whether it is in the affairs of the company and whether the company is party to the commission of the act of oppression; (b) a transaction of transfer of shares by a member could never be considered to be in the affairs of a company; and (c) if the registration of transfer is not oppressive and against the provisions of articles or the act, the transfer of shares is not required to be declared invalid, which are absent in the present case.
• The impugned transfers effected by the respondents 9 to 31 and approved by passing necessary resolutions at the board meeting are in strict compliance with the relevant provisions of the articles of association of the Company, which have been duly recorded and it is a conclusive evidence of the proceedings recorded under Section 184 of the Act. Thus, the impugned transfers are not violative of the articles of association and oppressive. This Board held in Cine and Supply Corporation Private Limited and In re: Palak Kumar Mondal and Ors. v. Satyabrata Jana and Ors. (2003) Vol. 115 CC 481 that (a) an illegal act need not be oppressive; (b) even if there is violation of the provisions of the articles of association, the same could not be considered an act of oppression, especially when, the aggrieved shareholder would have been entitled to only 23% of the shares; and (c) if there is nothing in the articles prohibiting a member from identifying a willing member on his own and negotiating the price for the shares, any transfer cannot be said to be violative of the articles. If the share transfers are held invalid, still the shares would revert back only to the members who were holding the shares earlier. There has not been violation of the articles and no case of oppression has been made out by the petitioners. It is enough, if the board of directors approved the transfer of shares and there is no requirement on the part of the board to approve second time the transfer of shares, to meet the requirements of Article 18. Article 20 would apply where a member intending to sell his shares has not identified any member who is willing to purchase the shares. Furthermore, the petitioners have not made out any prejudices caused to them, pursuant to the impugned transfer of shares. By a mere transfer of shares, without issue of fresh shares, new majority could not be created in favour of the second respondent. The first petitioner failed to attend the board meetings inspite of the notices sent to him and even assuming that the first petitioner had participated in the board meetings and voted against resolutions, still the share transfers would have been approved by a simple majority of directors.
• The first petitioner made several credit purchases in the name of the Company and failed to make any payment, thereby incurring huge losses to the Company by way of interest on account of delayed payment on credit purchases, compelling the first respondent to advise the suppliers not to supply materials on credit to the Company. The statutory records of the Company have never been in custody of the first respondent's husband and there was no need to take custody of the statutory records.
• None of allegations complained of in the petition would amount to acts of oppression or mismanagement, more so when, the affairs of the Company are not being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members and the facts do not justify the making of any order of winding up of the Company on just and equitable grounds.
4. The respondent Nos. 7 to 10, 16, 18 to 21, 23 to 27, & 29 neither appeared nor opposed the company petition, inspite of affording sufficient opportunity to them.
5. I have considered the pleadings and arguments advanced by learned Counsel. The main dispute raised by the petitioners is as to whether the transfers impugned in the company petition are in strict compliance with the relevant articles of association of the Company. Shri Vidhya Shankar, learned Counsel, placed reliance on a series of decisions cited supra, wherein the transfers made in violation of pre-emptive clauses contained in the articles of association have been held to be invalid and as such sought to nullify the transfer of impugned shares. The provisions governing transfer of shares in the Companies are enumerated in Articles 17 to 25, of which Articles 18 to 23 assume relevance for adjudicating the contentious issue, summary of which is as under:
• Article 18: No member shall be entitled to transfer his shares in the company save with the previous sanction of the board of directors.
• Article 19: No share shall be transferred to a non-member so long as any member is willing to purchase the same at a mutually agreeable value between the transferor and transferee.
• Article 20: Any member intending to transfer his share shall give notice in writing to the company, specifying the number of shares proposed to be transferred together with the value and further appointing the company as his agent for the sale of shares mentioned therein. This is intended to ascertain the willingness of any member to purchase the shares offered by the transferor.
• Article 2: The board of directors, after receipt of any notice under Article 20, may decide regarding the transfer of such shares, which shall be final.
• Article22: The intending transferor as well as the purchasing member shall execute the instruments of transfer as per Section 108 of the Act and complete the transactions.
• Article 23: The board of directors may in their discretion refuse to register the transfer of shares - (a) to any person who is not desirable to be admitted as member, in the interest of the company; (b) if the company has a lien on such shares; and (c) if the number of members exceeds the limit prescribed under the articles.
A careful analysis of the articles suggests that no shareholder is empowered to transfer his shares in the Company except with the previous sanction of the board of directors. The language used in Article 18 being in the negative form, it emphasises the insistence of compliance with "the previous sanction" of the board of directors, before the transfer of shares by any member in the Company and therefore, in my considered view, the requirements of Article 18 are mandatory in character and not merely directory, irrespective of the fact whether the transfer of shares is in favour of any member or non-member. By virtue of Article 19, no share is transferable to a non-member provided any member is willing to purchase the same at a mutually agreeable value. It is, therefore, open to a member before transferring his shares in favour of a non-member, to ascertain the willingness of any member to purchase the shares so offered by any selling member, which is however subservient to Article 20, according to which, any member intending to transfer his shares shall give notice as prescribed therein, appointing the company as his agent for the sale of shares, on which the board of directors has to decide, under Article 21, regarding the transfer of such shares. Thus, it is ieft to the absolute discretion of the board of directors either to register or refuse to register the transfer of shares and the decision of the board of directors is final. It is only on and after completion of these requirements, namely, (a) previous sanction of the board of directors (article 18); (b) issue of transfer notice to all the members (article 20); and (c) decision of the board of directors regarding the transfer (article 21), the intending transferor and the purchasing member, as stipulated in Article 22, shall execute the instrument of transfer in accordance with the provisions of Section 108 of the Act and complete the transactions. The expressions "complete the transactions" appearing in Article 22 connote that the execution of instrument of transfer shall necessarily be preceded by the requisites of Articles 18, 20 & 21. Article 23 deals with the circumstances under which the board of directors may refuse to register the transfer of shares in the Company. Therefore, any transfer of shares in favour of either a member or non-member, without due compliance with the prescribed procedure, will not be in consonance with the letter and spirit of the relevant articles discussed supra. The articles do not envisage, as rightly pointed by Shri Vidhya Shankar, learned Counsel, any negotiated transfer of shares between the existing members, without adhering to the requirements of relevant articles. By virtue of Section 36, the articles of association of a company are a contract between the members as reiterated in John Tinson and Company Private Limited and Ors. v. Mrs. Surjeet Malhan and Anr. (supra) and any member in his capacity as a member can enforce rights given to him by the articles, such as the rights of pre-emption etc. Having found the binding nature of various articles, 1 shall proceed to consider as to whether the impugned transfers are in strict compliance with such articles, in view of the settled position of law that every transfer of shares of a private company has to be strictly in accordance with articles. The company shall always follow the terms of applicable articles in respect of any transfer of shares. It is observed from copies of the instruments of transfer and minutes of various board meetings of the Company produced before the Bench that the first respondent and her family members and/or associates had acquired the impugned shares of the Company as per the following details:
S. Name of Name of No. of Date of Date of sanction
No. transferor transferee shares transfer by the Board
1 N. Jayabalan Shanthini 500 01.01.2004 25.01.2004
Jayakrishnan
2 Rajalakshmi Shanthini 500 16.11.2003 23.11.2003
Jayakrishnan
3 S. Sridhar Shanthini 1000 16.11.2003 23.11.2003
Jayakrishnan
4 Manikandan Shanthini 1000 19.08.2003 26.08.2003
Jayakrishnan
5 Shanthini E.D. Suchindraa 500 16.11.2003 23.11.2003
Jayakrishnan
6 G. Venkateswari S.M. Sivakumar 500 16.11.2003 23.11.2003
7 P. Jothi Shanthini 500 01.08.2003 26.08.2003
Jayakrishnan
8 A. Nazar Shanthini 500 19.08.2003 26.08.2003
Jayakrishnan
9 M.H. Kheeba- Shanthini 1000 19.08.2003 26.08.2003
thullah Jayakrishnan
10 E. Manimala Shanthini 500 01.08.2003 26.08.2003
Jayakrishnan
11 M. Subramaniam Shanthini 100 01.08.2003 26.08.2003
Jayakrishnan
12 K. Baskar Shanthini 3250 01.08.2003 26.08.2003
Jayakrishnan
13 G.S. Suresh Shanthini 2650 01.08.2003 26.08.2003
Jayakrishnan
14 G.D. Sekar Shanthini 1100 01.08.2003 26.08.2003
Jayakrishnan
15 G.D. Selvaraj Shanthin 600 01.08.2003 26.08.2003
Jayakrishnan
16 G.S. Latha Shanthini 2150 01.08.2003 26.08.2003
Jayakrishnan
17 G.S. Gayathri Shanthini 2150 01.08.2003 26.08.2003
Jayakrishnan
18 R. Venkatesan Shanthini 500 01.08.2003 26.08.2003
Jayakrishnan
19 K. Palani Samy Shanthini 1100 01.08.2003 26.08.2003
Jayakrishnan
20 P. Mageswari Shanthini 2400 01.08.2003 26.08.2003
Jayakrishnan
21 S. Sekar Shanthini 500 20.07.2003 26.08.2003
Jayakrishnan
22 M. Ponnusamy Shanthini 500 20.07.2003 26.08.2003
Jayakrishnan
23 Thankamma Shanthini 1900 01.08.2003 26.08.2003
Joseph Jayakrishnan
24 Joy John Shanthini 1500 01.08.2003 26.08.2003
Jayakrishnan
25 V.M. Joseph Shanthini 1000 01.08.2003 26.08.2003
Jayakrishnan
26 Raju David J. Yuvana Rekha 2000 20.07.2003 31.07.2003
27 V.M. Joseph Ajay Sivakumar 200 20.07.2003 31.07.2003
TOTAL 30100
It is clear from the above details that the transfer of 30100 shares of the Company were made on 20.07.2003, 01.08.2003, 19.08.2003, 16.11.2003 and 01.01.2004, while the board of directors of PBPL accorded its sanction under Article 18, after effecting the transfers by the transferors, on 31.07.2003, 26.08.2003, 23.11.2003 and 25.01.2004 respectively.
It is unequivocally clear from the above board resolutions that the transfer deeds duly executed and stamped had been submitted to the Board for necessary approval. It is, therefore, beyond doubt that none of the transfer instruments impugned in the present proceedings, is preceded by previous sanction of the board of directors of the Company in tune with the mandatory requirements of Article 18. The respondents have not caused production of any material to establish that the transfers were made in favour of the first respondent and her associates, with previous sanction of the board of directors of the Company in strict compliance with Article 18. The Supreme Court in John Tinson and Compan Private Limited and Ors. v. Mrs. Surjeet Malhan and Anr. (supra), while interpreting the articles which provided that "no transfer of any share in the capital of the company shall be made or registered with the previous sanction of the directors", categorically held that there should be a written resolution accepting the transfer from the transferor to the transferee and such previous sanction should precede the handing over the shares. This legal proposition has been adopted by this Board in Radhe Shyam Tulsian and Ors. v. Panchmukhy Investments Limited and Ors. (supra) thus: "Where the company is a public limited company and there is no specific provision in its articles that no transfer of any shares in the capital of the company shall be made or registered without the previous sanction of the directors, the objection that the board of directors had not resolved to register the transfer of share and therefore there is no valid registration would not be tenable." In the present case before me, the handing over of all the shares by the transferors to the transferees, without any doubt, preceded the sanction of the board of directors accepting the transfers, which is not in consonance with Article 18 and the principles enunciated by the Supreme Court. In Cine and Supply Corporation Private Limited and In re: Palak Kumar Mondal and Ors. v. Satyabrata Jana and Ors. (supra), while there are articles which are similar and identical to Articles 19 and 20 prevalent in the Company before me, there is no article to the effect that "no member shall be entitled to transfer his shares in the company except with the previous sanction of the Board of Directors", which forms part of the articles of association of the present Company. In this context, it was observed in that case that there is no provision in the article prohibiting a member from identifying a willing member on his own and negotiate the price. However, in view of Article 18, in the present case, a member is prohibited from identifying a willing member on his own and negotiate the price for shares, without appointing the Company under Article 20, as his agent for the sale of shares. Furthermore, in that case the shareholders took a decision to transfer the shares with a view to protect the interest of the company, which was in financial difficulties. Thus, the decision cited by Shri Pandian, learned Counsel has no application to the case on hand. The transfer of shares of the Company in favour of Ajay Shivakumar, Yuvana Rekha, E.D. Sushindra and S.M. Sivakumar, being non-members, as on the date of transfer, in terms of the instruments of transfer dated 20.07.2003, 20.07.2003, 16.11.2003 and 16.11.2003 respectively in the absence of any material showing the issue of any transfer notice by the transferor concerned, is hit by Article 20. Any transfer of shares denying a privilege available to the member in violation of the articles has been disapproved in Akbarali A. Kalvert and Anr. v. Konkan Chemicals Private Limited and Ors. (supra). This Board held in (a) S. Varadarajan and Anr. v. Udhayem Leasings and Investments Private Limited; and (b) M.M. Dua and Ors. v. Indian Dairy and Allied Services Private Limited and Ors. (supra) that any transfer of shares without exhausting the rights of pre-emption in violation of the articles would constitute an act of oppression. In this context, the assertion made on behalf of the respondents that all the impugned transfers would have been approved by the boards even with participation of the first petitioner does not merit any consideration. Shri R. Vidhya Shankar, learned Counsel, while placing reliance on M.M. Dua and Ors. v. Indian Dairy and Allied Services Private Limited and Ors. (supra) pointed out the spirit behind the pre-emptive provisions of the articles and urged that the equity of the transferors is no way affected if the respondents herein are directed to make an offer to the other shareholders in proportion to their shareholding in the Company. However, considering the requirement of previous sanction and exclusive authority of the board of directors, bestowed on them by virtue of the articles, discussed supra, to decide regarding the transfer of shares, this decision sought to be relied upon by Shri Vidhya Shankar, learned Counsel, renders no assistance to the petitioners. The plea raised by the respondents, on the strength of Hillcrest Realty SDN. BHD. and Anr. v. Hotel Queen Road Private Limited and Ors. (supra) that any transfer of shares being a private arrangement between the transferor and transferee cannot be considered to be in the affairs of the company and consequently, the registration of such transfer by the company can neither be construed to be oppressive, must be viewed in the light of the observations of this Board in the said decision that any transfer of shares of a private company has to be strictly in accordance with the articles and therefore, the company should always follow the terms of applicable articles in respect of any transfer. The whole purpose of Article 20, appointing the board as an agent of the member intending to transfer the shares, for effecting the sale of shares and making the board, under Article 21, the deciding authority on transfer of shares is to ensure that the shares are offered to all the members before transferring to non-members. The execution of instruments of transfer in respect of the impugned shares in compliance with Section 108 of the Act by the intending transferor and purchasing member as contemplated in Article 22, without due completion of the requirements of Articles 18 and 21, is neither contemplated nor permissible under the articles. The first respondent reportedly held, prior to the impugned transfers, about 8.58% of the paid up capital of the Company which came to be enhanced by 30,100 shares, as borne out by copies of the minutes of various board meetings of the Company produced before the Bench, which resulted in the first respondent and her family members acquiring the controlling interest in the Company.
By virtue of Section 53(1), a document may be served by the company on any member either personally, or sending it by post to his registered address. It is on record that the Company had convened 13 board meetings between the period from 15.11.2002 to 10.09.2004 namely, 15.11.2002, 10.02.2003, 30.04.2003, 07.06.2003, 07.07.2003, 31.07.2003, 26.08.2003, 12.09.2003, 30.10.2003, 23.11.2003, 25.01.2004, 20.05.2004 and 10.09.2004 transacting inter-alia, progress of the affairs and business of the Company, approval of accounts, transfer of shares, co-option of directors, appointment of managing director, purchase of assets, issue of duplicate certificates etc. The first petitioner never attended any of the board meetings save the lone board meeting held on 30.10.2003 and it is found that he was granted leave of absence from attending these board meetings, thereby the first petitioner was not involved in the day-to-day affairs of the management of the Company since November, 2002. Furthermore, in the absence of any material to substantiate the purported request from the first petitioner seeking leave of absence, it is quite improbable that the first petitioner had either knowledge of the board meetings or requested leave of absence from attending the board meetings and therefore, the extracts of the attendance register produced by the respondents, to my mind, are self serving documents, without advancing the case of the respondents. The first respondent has not even produced copies of the notice of various board meetings of the Company said to have been sent to the first petitioner and there is no material whatsoever, to substantiate either dispatch or service of any of such notices, except for the board meeting of 30.10.2003. The settled legal proposition is that notice to every director of a meeting of the board of directors is mandatory, without which any resolution passed at such meeting is in operative as held in Parameshwari Prasad Gupta v. Union of India (supra). This shall equally apply to the resolutions passed by the board of directors of the Company, appointing directors and sanctioning transfer of shares, impugned in the company petition.
By approving the transfer of 30,100 shares of the Company in favour of the first respondent and her family members and/or his associates, without however, affording any opportunity in favour of other shareholders in exercise of the right of pre-emption for purchase of the shares offered by the transferors, the directors, whose conduct should be above suspicion as observed by the Supreme Court in Kamal Kumar Dutta and Anr. v. Ruby General Hospital Limited and Ors. (supra), have not shown that they have acted with utmost good faith and for the benefit of and in the interest of the Companies, in accordance with the memorandum and articles of association of the Companies, as laid down in Dale and Carrington Investment Private Limited and Anr. v. P.K. Prathapan and Ors. and Vaishnav Shorilal Puri and Ors. v. Kishore Kundanlal Sippy and Ors. (supra). The impugned transfers disturbed the parity of shareholding maintained by the contesting shareholders, which resulted in the second respondent and his family members garnering the controlling interest in the Companies. The appointment of first respondent's family members as directors, with a view to control the board is neither bonafide nor in the interest of the Companies, as held in Kshounish Chowdhury and Ors. v. Kero Rajendera Monolithics Limited and Ors. (supra). The decision of the board of directors to oust the first petitioner from the managing directorship and to install first respondent in his place, without any valid notice to him constitutes an act of oppression, in view of the observations of the Supreme Court in Kamal Kumar Dutta and Anr. v. Ruby General Hospital Limited and Ors. (supra). I, therefore, do not hesitate to conclude that the required facts to sustain the allegations of oppression as envisaged in Hillcrest Realty SDN. BHD. and Anr. v. Hotel Queen Road Private Limited and Ors. (supra) do exist in the present cases.
The apparent discrepancies pointed out by Shri R. Vidhya Shankar, learned Counsel, in relation to certain instruments of transfer produced by the respondents would lead to the conclusion that the mandatory requirements of Section 108 of the Act, as emphasised in Shailesh Rajnikant Parekh v. Starline Travels Private Limited and Ors. (supra) have not been duly satisfied before effecting the transfer of some of the shares in favour of the first respondent and her family members. The impugned transfers having been found to be violative of the articles of association of the Companies, it is nothing but futile to go into various deficiencies appearing in the instruments of transfer produced in the present proceedings. The grievances of the petitioners on account of the statutory records which were never produced before the Advocate Commissioner for authentication, procurement of raw materials and day-to-day operations of the factory, shall appropriately be dealt with by the board of directors of the Company, in terms of the order proposed to be made in this behalf.
In view of my foregoing conclusions and (i) in exercise of the powers under Sections 397 and 398 read with Section 402; (ii) to make appropriate orders bringing to an end the matters complained of and (iii) to regulate the conduct of the future affairs of the Company, the following order is passed:
(i) all the transfers effected after June, 2003 in respect of shares of the Company, impugned in the company petition, being violative of the articles of association, are hereby set aside and the Company shall accordingly, rectify the register of members within a period of 30 days;
(ii) the members of the Company shall reconstitute the board of directors; appoint the managing director by 30.04.2007; carry on the regular business in accordance with the articles of association of the Company and meet the statutory obligations;
(iii) the Company shall, hence forth give notice of the board meetings to every director by registered post with acknowledgment due.
With the above directions, the company petition and connected applications stand disposed of. No order as to cost.