Andhra HC (Pre-Telangana)
Anam Premkumar Reddy And Ors. vs India Fruits Ltd. And Ors. on 2 September, 1995
Equivalent citations: 1995(3)ALT170, [1996]85COMPCAS625(AP)
Author: T.N.C. Rangarajan
Bench: T.N.C. Rangarajan
JUDGMENT T.N.C. Rangarajan, J.
1. This is a petition under section 155 of the Companies Act, 1956.
2. According to the petition, the first petitioner is the son of the third respondent, and the other petitioners are the wife and children of the first petitioner. They are shareholders in the first respondent-company and the second respondent-company. The fourth respondent is the wife of the third respondent. The fifth respondent is the family trust set up by the third respondent. The first respondent-company had been functioning practically as a family concern, and in 1960 it set up a unit for manufacture of electrical conductors as a division under the name Anam Electrical Manufacturing Company which later became the second respondent-company. Another partnership firm called Godavari Electrical Conductors was set up and it purchased 4,436 out of 5,450 equity shares in the first respondent-company utilising a sum of Rs. 1.55 crores taken from the second respondent. The said loan was being repaid with the dividends earned on the shares with the result that in 1988 the outstanding principal was only Rs. 10.09 lakhs and unpaid interest amounted to over Rs. 1.30 crores. On October 21, 1982, the third respondent executed a trust-deed with an initial fund of Rs. 1,116 reciting as the object, the maintenance of a controlling interest in the company by holding more than 66 per cent. of the equity shares and to provide reasonable income for life for the members of the family. It was declared to be a private non-discretionary and irrevocable trust. The beneficiaries under the trust were a charitable trust known as A.V. Reddy Charitable Trust - 15 per cent., with the other beneficiaries as Smt. A. Saraswathy, the fourth respondent 12 1/2 per cent.; the first petitioner 20 per cent.; the second and third petitioners 5 per cent. each; the fourth, fifth and sixth petitioners 12 1/2 per cent. each; and the seventh petitioner 5 per cent., in respect of whom only the share of the distributed income had to be given during their life time and after their life, the share of each person has to be divided equally among his heirs in the male line and in their absence among his heirs in the female line in respect of sons only while in respect of the wife and daughters of A. Premkumar Reddy their shares after their life will accrue to the corpus of the trust. Some of the petitioners had moved a Company Petition No. 42 of 1990, feeling oppressed by the conduct of the third and fourth respondents who are in management, and a compromise was effected on November 19, 1990, whereupon two of the petitioners amongst petitioners Nos. 4 to 6 were taken into the board of the company and, accordingly, that company petition was withdrawn. Subsequently, a deed of extinguishment of the trust was registered by the third respondent on February 25, 1991, and in the register of members of the company the entry relating to the shares held by the trust was changed to indicate that the shares were held by the third respondent in his individual status and not as a trustee. According to the petition, the change effected in the register of members was invalid as the trust continued to exist without extinguishment and hence the petition originally prayed for declaration that the fifth respondent-trust is a valid and legal owner of the shares or in the alternative to declare that 4,436 shares belong to the partnership firm Godavari Electrical Conductors and its partners. Subsequently, the petition was amended with the permission of the court to pray for rectification of the entries newly made in folios 38 and 39 of the register of members and to declare that the original entries remain intact. The earlier prayers have been given up.
3. In the counter-affidavit filed on behalf of the first respondent, the third respondent stated that the application was not maintainable; that the earlier application under section 397 filed on the apprehension that he is likely to transfer the shareholding of the company as the trustee, having been withdrawn, the same matter could not be agitated in a fresh petition; and that the petitioners had no locus standi to maintain the petition because the shares do not stand in their names and could not be transferred in their names. It is also stated that the matter was entirely a family dispute for control of the company which could not be agitated in the form of a rectification petition. The further pleading is that the conflicting issues of fact had to be gone into by recording voluminous evidence and it should be done in an appropriate suit in the civil court and not in summary proceedings under section 155. According to the respondent, a 100 per cent. subsidiary company called Anam Machinery Fabricators Limited with an authorised capital of Rs. 2 crores and paid up capital of Rs. 1.5 crores was established in February, 1978, by which a substantial portion of cash of the first respondent passed to the second respondent which in turn gave a loan to the partnership firm Godavari Electrical Conductors with which it purchased 4,436 shares of India Fruits Limited at the rate of Rs. 3,450 per shares totalling to Rs. 1.53 crores. Thereafter, the firm pledged the shares with the second respondent as security for the loan which carried interest of 18 per cent. Between 1978 and 1983, Rs. 1.20 crores were repaid and adjusted against the capital account. The third respondent states that he executed a trust deed on October 21, 1982, with an initial fund of Rs. 1,116 and purchased 4,436 shares from Godavari Electrical Conductors at Rs. 3,169 per share in respect of which the trust had to pay to the Godavari Electrical Conductors, Rs. 1.40 crores. Since the firm was already indebted to the second respondent, the equivalent liability was taken over by the trust. Subsequently, on February 25, 1991, he executed a registered deed of extinguishment of the family trust for the reason that in the income-tax proceedings the purchase of the shares with the corresponding liability was not accepted and a huge tax liability was levied and the price of the shares went down to Rs. 2,053 per share on yield basis with the result that the capital value of the shares was exceeded by the liability and it became impossible to perform the objects of the trust. Accordingly, the shares were registered in the name of the third respondent as an individual by transmission. The respondent states that the entry in the register was therefore correct and the petition under section 155 does not survive. The fourth and fifth respondents have also filed counter-affidavits in support of this stand. The petitioner filed a reply-affidavit disputing all the statements in the counter-affidavit .The third respondent again filed a rejoinder.
4. Oral evidence was also adduced by both the sides, most of it relating to the motivation of either side and the genesis of the family disputes and mutual hostilities. The following issues were framed :
(1) Whether the petition filed under section 155 of the Companies Act is maintainable? (2) Whether the claim that the petitioner is owner of shares consequent to the extinguishment of the trust declared by Mr. A.V. Reddy can be enquired into and a declaration granted in a petition under section 155 of the Companies Act, 1956? (3) Whether the trust declared by Mr. A.V. Reddy was extinguished and the consequences thereof? (4) Whether the rectification can be granted as prayed for?
Issue No. 1 - Learned counsel for the respondents raised a preliminary objection that this petition is not maintainable as it does not fall within the scope of section 155 of the Companies Act, 1956. The three main objections taken were that the section refers only to the rectification of the name of any person and since the petition does not deal with the name of the shareholder which is recorded as Anam Venkat Reddy, no order can be passed under this section. Secondly, that the section provides for a decision on any question relating to the title of the person who wants to have his name entered or omitted from the register, and since the application does not seek such prayer it is not maintainable. Thirdly, that no notice of any trust can be entered in the register of members under section 153 and, therefore, notice of such trust entered under section 187C cannot be regarded as part of the register of share members amenable to rectification. It is also argued that the section itself was meant for recording or removing the names of shareholders who acquire shares by transfer and those who apply for recording devolution by transmission which was by operation of law and not by any inter-party transaction. On the other hand, learned counsel for the petitioners submitted that the section had to be construed liberally as a beneficial legislation to see that the real owner of the share finds his place in the register of members. It is also submitted that section 155 is not in the nature of summary procedure since the title to a share could be gone into just as in a suit and further, there being no review against the action of the company in erroneously recording the beneficial interests under section 187C, the power of the court under section 155 had to be invoked in this case also. Learned counsel for the petitioner also disputed the contention of learned counsel for the respondents that the earlier petition under section 397 precluded the filling of this petition by stating that this petition by stating that this was an independent matter for which the cause of action itself arose after the withdrawal of the earlier petition. I think it is appropriate to dispose of the last objection of the respondents immediately as I agree with learned counsel for the petitioners that the cause of action for this petition itself occurred subsequent to the withdrawal of the earlier petition under section 397, since the offending entry was made after February 25, 1991, whereas the company petition was withdrawn on November 23, 1990, itself.
5. I may now take up the question whether section 155 can be invoked for correcting an error in the note by a declaration of trust recorded under section 187C. It has to be remembered that under section 150, every company shall keep a register of its members showing the name and address and occupation of the member, shares held by him and the date on which he was entered in the register as member and the date on which he ceased to be a member. Section 153 states that no notice of any trust, express, implied or constructive, shall be entered on the register of members or of debenture-holders. Section 153B provides that when the shares of a company are held in trust, he should make a declaration to the public trustee when the value of the shares exceed Rs. 1 lakh or 25 per cent. of the paid-up share capital, whichever is more. Moreover, section 187C provides that notwithstanding anything contained in section 150, section 153B or section 187B, if any member of the company does not hold the beneficial interests in the shares, he shall make a declaration to the company specifying the name and other particulars of the person who holds the beneficial interests in the shares. Sub-section (3) provides that whenever there is a change in the beneficial interests in such shares, the beneficial owner shall, within thirty days from the date of such change, make a declaration to the company in such form and containing such particulars as may be prescribed. The failure to make a declaration is punishable as well as the failure of the company to comply with the provisions of the section. Obviously, the question of punishment would arise only after a declaration is made and the company does not record the same. At the same time, it is clear that section 187C does not provide for any machinery for rectifying an error in the declaration made by the shareholder or in the note recorded by the company in the register of members. We may now turn to section 155, which reads as follows :
"155. Power of court to rectify register of members. - (1) If -
(a) the name of any person -
(i) is without sufficient cause, entered in the register of members of a company, or
(ii) after having been entered in the register is, without sufficient cause, omitted therefrom; or
(b) default is made, or unnecessary delay takes place, in entering on the register the fact of any person having become, or ceased to be, a member;
the person aggrieved, or any member of the company, or the company, may apply to the court for rectification of the register."
6. A literal reading of this section would indicate that it refers to the rectification with reference to the "name of any person" entered in the register of members of the company. The question that arises is whether the expression "the name of any person" would include also the capacity or status which has to be recorded as a note upon the member making the declaration under section 187C. Learned counsel for the respondents pleaded for a literal reading of the section on the ground that under section 153 no notice of any trust shall be entered in the register of members and, therefore, the expression "the name of any person" cannot include the notes of his capacity as a trustee. On the other hand, learned counsel for the petitioners submitted that if this section is not extended to rectification of an error in respect of the capacity of the person, then there would be no remedy in the Act for rectification of any such errors.
7. It is well to remember that the provision of section 187C itself was brought into the Act by the companies (Amendment) Act, 1974 (41 of 1974), with effect from February 1, 1975, with a view to expose benami transactions. Generally speaking, the principle of section 153 was that the company should be relieved from any obligation to take notice of equitable interest in its shares as it need not be concerned with the rights of third parties in respect of the shares held by the ostensible owner. However, the Government noted that certain trusts had large holdings which are used for having control over the companies and in order to limit such control the provisions of section 153B was introduced by Act No. 53 of 1963, with effect from January 1, 1964, creating a public trustee who may exercise the voting power of the trusts. At the same time, from the point of view of the company, the declaration of equitable rights would also enure to its benefit for the purpose of requiring the person having beneficial interests to accept calls for share capital without having the liability to pay the dividend except of the ostensible owner. It is in this background we have to consider whether the note that is recorded under section 187C should be treated as part of the name in the register of members so that if there is any mistake in the note it could be rectified under section 155. In the case of Indian Chemical Products Ltd. v. State of Orissa [1966] 36 Comp Cas 592, the Supreme Court had the occasion to consider the provisions of section 38 of the Indian Companies Act, 1913, analogous to the present section 155, where the question arose whether the devolution by operation of law could also be considered as a transfer for the purpose of rectification, and the Supreme Court observed that the jurisdiction created by the section is very beneficial and should be liberally exercised. The court stated that the directors of the company in that case on the most frivolous of objections, prevented the State or Orissa from becoming the member for the last sixteen years and hence there was no reason why the court should not grant the applicant's relief under that section. I derive inspiration from this passage to hold that the essential purpose of section 155 is to see that the register of members reflects truly and correctly the members of the company and their status with reference to the capacity as declared under section 187C so that both the rights of the company to call for the share capital as well as the rights of the persons having beneficial interests with reference to the voting power that could be exercised by the public trustee under section 187B could be protected in view of the latest amendments to the Act. Even though before these amendments came into force, the expression "the name of any person" under section 155 would have been restricted only to the name and the said expression was not amended consequentially, the other amendments by insertion of sections 153B and 187C, by necessary implication, require that the total entry in the register of members which includes recording of a note under section 187C, must form part of the name of the person as registered which falls for consideration under section 155. The argument of learned counsel for the respondents that only a person who wants to have his name entered or omitted can maintain an application, also requires to be rejected because the provisions of the sub-section relating to the question of title of a person who wants his name to be entered or omitted, cannot limit the scope of item (ii) of sub-section (a) which refers to the name of the person entered in the register, being without sufficient cause, omitted. Since any member of the company can apply for rectification and not necessarily a person whose name is omitted, the provisions of this section are not confined to the case of the applicant alone whose name is required to be added or omitted. Sub-section (3) only provides for the procedure where the issue is other than the title of the applicant and sub-section (3)(b) provides that the court may decide any question which is necessary or expedient to be decided in connection with the application for rectification. Therefore, the scope of this section is wide enough to cover the cases where a declaration of trust after having been entered in the register under section 187C is, without sufficient cause, omitted therefrom. No doubt, the section was primarily meant to resolve the disputes relating to transfer of shares and the consequent addition or omission of the name of the shareholder in the register of members. Yet, it was recognised that all the registered particulars would be amenable to rectification as otherwise the register would become as untrue as if false particulars have been registered initially (see Palmer's Company Law, volume 1, page 7024/1, para. 7.104). Therefore, even as observed by the Supreme Court in the case cited above, the scope of this section cannot be limited to such cases alone and has to be extended to the cases of any errors in the register of members so that it reflects the information required under the Act under section 150 read with section 187C, correctly.
8. Learned counsel for the respondent submitted that sections 187A and 187B were concerned with the voting rights and section 187C also was stated to be brought in for the purpose of recording benami transactions and hence that section should be considered to be inapplicable to the facts of this case and consequently an entry made under that section would not be amenable to rectification. I am unable to accept this contention because section 187C by itself is not confined to benami transactions and after all such transactions were also in the nature of trusts under section 82 of the Indian Trusts Act. There is also a circular of the Company Law Board (at page 1189 of the Companies Act, 13th edition of Ramaiya) clarifying that section 187C is applicable to private trusts. Counsel also argued that the proceedings under the Companies Act are considered to be of a summary nature and not of exclusive jurisdiction as held in Sree Krishna Jute Mills v. Krishna Rao, AIR 1947 Mad 322, which was a decision binding on this court being a pre-1953 decision according to the decision in M. Subbarayudu v. State [FB]. Reliance was also placed on the decision of the Full Bench of the Delhi High Court in Ammonia Supplies Corporation Private Limited v. Modern Plastic Containers Private Limited [1994] 79 Comp Cas 163 (Delhi) [FB] to contend that the question of validity of the trust must be left for being decided in a suit and cannot be gone into in these proceedings. These decisions only indicated that where there is a complicated question of fact, the company court in its discretion may refer the parties to a suit. In fact, in the Full Bench case the real question was whether the suit is barred when a summary remedy has been provided under the Companies Act. It must be remembered that section 155 itself provides for an enquiry by a company court in which a question of title as well as other incidental matters are involved. In the present case, the issues turn on the construction of sections 155 and 187C of the Companies Act and section 77 of the Indian Trusts Act and do not involve any complicated questions of fact. Even though a voluminous oral evidence was adduced, which I could not disallow as I had come on the scene in the middle of the case, most of it was absolutely unnecessary for deciding the crucial issues in the case. I am, therefore, convinced that this petition is maintainable and I hold accordingly.
Issue No. 3. - One of the matters, or rather the primary question on the merits which requires to be decided is whether the trust was extinguished. Section 77 of the Indian Trusts Act, 1882 states :
"77. Trust how extinguished. - A trust is extinguished,
(a) when its purpose is completely fulfilled; or
(b) when its purpose becomes unlawful; or
(c) when the fulfilment of its purpose becomes impossible by destruction of the trust property or otherwise; or
(d) when the trust, being revocable, is expressly revoked."
9. The contention of the respondents is that by reason of the value of the shares being less than the amount of the loan and the interest outstanding, the trust property must be considered as unavailable and, therefore, the trust had become extinguished. Learned counsel for the respondents endeavoured to show that the expression "destruction of the trust property or other wise" in section 77 would include a case where the value of the property was so reduced that there was nothing available for maintaining the corpus of the trust. The decision in Princess Usha Trust v. CIT referred to a case where after distributing the trust property nothing remained in the corpus so that the fulfilment of the trust had become impossible and, therefore, the trust had been extinguished. But, in a case like this where the trust property admittedly exists, but according to the respondents, the value of that property is less than the debts charged thereon, it cannot be said that the property itself has been destroyed. I am of the opinion that the word "destruction" would mean that the property has gone out of existence and hence is unavailable for distribution. The word "otherwise" would also have to be read ejusdem generis such that whatever be the process, the trust property itself is not in existence or virtually unavailable. In a case such as this where the shares do exist though may be burdened with some debt, I do not consider it possible to accept the contention that the property does not exist and thereby it could have led to a situation where the purpose of the trust becomes impossible of fulfilment. It is also necessary to consider the provisions of the trust deed which clearly indicate that the trust is non-discretionary and irrevocable. The main object of the trust appears to be to have control of the company since it is provided under clause 30 that the shares can be sold to the beneficiaries in such numbers as will not reduce the shareholding by the trust in the company below 66 per cent. and the value of the shares should be either the break-up value of the shares arrived at from the latest balance-sheet of the company or a higher value where thought fit. There is the power to alter the object of the trust by supplementary deeds, but the irrevocable and non-discretionary nature is not to be disturbed and in fact, no such amendments are pleaded. The beneficiaries are to get a share in the income whereas the legal heirs of the sons are to get a share of the corpus, and it is not in dispute that on the date when the trust was taken to have been extinguished by the deed dated February 19, 1991, the legal heirs had been born or were en ventre sa mere. Though the trust was to continue during the life time of the income beneficiaries and until the last male heir attains majority, even assuming that the trust could be determined on the date when it was taken to be extinguished, the beneficiaries existing on that date had the right under section 56 of the Indian Trusts Act, for transfer of the corpus in their names. An illustration given to section 56 says that when A transfers certain property to B and directs him to sell or invest it for the benefit of C, who is competent to contract, C may elect to take the property in its original character. In other words, the option of taking the corpus is with the beneficiary and not with the trustee. All the more so in the case of an author who ceases to have any interest in the property when he declares an irrevocable trust and cannot exercise any powers in the capacity of an author though he happens to be a trustee. Learned counsel for the respondents banked on section 83 to contend that where it is incapable of execution, the property will revert to the author. But that actually begs the question. Unless it is possible to say that the trust was incapable of execution, the author has no right to appropriate the property to himself. We go back to section 77(c) for that matter as to whether the fulfilment of the purpose became impossible. As seen from the trust deed, the purpose was to hold the majority of shares to control the company and that purpose has not in any way become diluted or impossible by reason of the outstanding liability being more than the estimated value of the shares, nor has the corpus become unavailable. I am of the opinion that it would be necessary for the trustee to liquidate the shares and demonstrate that the amount realised is less than the outstanding debts. To a pertinent question in the parol evidence, the third respondent stated that the current price will be more, but the shares were not for sale. It is also significant that while claiming that the value of the shares has become less than zero by reason of the outstanding liability, he also claims that the property has reverted to him and he is the owner of the shares, which is sufficient to indicate that the corpus of the trust existed and was not destroyed by reason of certain debts. The third respondent in his pleadings as well as parol evidence attempted to explain his action with reference to certain wealth-tax assessment. Learned counsel for the respondents submitted that in the income-tax and wealth-tax assessments, the income-tax department did not accept the declaration of the trust as genuine but ultimately the Income-tax Appellate Tribunal held that whether the trust is accepted as genuine or not, the liability should be set-off against the value with the result that there was no tax liability and that the question itself became academic. The decision of the Tribunal also became final since a reference application made by the department was rejected by the High Court. Reliance was also placed on the value of the shares mentioned in these assessments to indicate that if that value was taken, the outstanding loan will be more the value of the shares. But, I am unable to accept this contention because, firstly, the valuation was made only for the purpose of wealth-tax where the assessees always try to take the minimum value to reduce the tax burden to the extent it is acceptable to the department whereas the real value may be more if taken by break-up method unlike the yield method which was adopted in this case. The trust deed itself talks only of the break-up method giving emphasis to the real value of the assets held by the company, particularly in the case of a closely held company as in this case. It is, therefore, apparent that neither the author nor the trustee can declare the trust to be extinguished by adopting the estimated value that is accepted by the income-tax department, as the basis for the claim that the value of the corpus has become less than the outstanding debts, because while the figure of the outstanding is certain, the value of the assets is remote and uncertain. In case of the valuation of the shares, which may fluctuate from time to time, it is significant to note that what may be considered to be a sick company at one point of time may become a flourishing one even if it had been taken through some disasters, and unless the shares are actually liquidated it is not possible to postulate that at any point of time the trust has become extinguished only because on that date the estimated value of the shares was less than the outstanding liability. The argument of learned counsel for the respondents was that the extinguishment was not by an act of the third respondent either as an author or the trustee but by operation of law at the time when the value of the shares was below the outstanding liability. Learned counsel was also at pains to remove any impression that this action was not bona fide. We are not concerned with the question whether the third respondent took the step bona fide or not, as the real issue is only whether there could be an extinction of the trust by reason of the trustee or author estimating the value of the assets to be less than the outstanding liabilities. As discussed above, since the valuation would fluctuate from time to time it is not possible to accept this contention, as the claim under section 77 that the trust property is unavailable or that the corpus has become exhausted by the outstanding dues, has to be established in actual fact and not by a assumption. With reference to section 77(c), there cannot be an extinguishment by operation of law but only by the happening of an event, viz., that the corpus is wiped off actually by realisation to clear off the trust debts akin to destruction. Unless the corpus is liquidated and reduced to nil by paying off the outstanding debts, it is not possible to claim that the trust has become extinguished under section 77(c). Learned counsel for the respondent submitted that the trust deed did not provide for sale of the shares and since the income beneficiaries have no interest in the shares and the corpus beneficiaries are not entitled to anything until determination of the trust, which will arise only at a point of time when the last of the beneficiaries attains majority, neither of them had any right to question the discretion of the trustee to declare that the trust has become extinguished. The decisions in CIT v. B.A. Sanghrajka Trust and Gosar Family Trust v. CIT relied on by learned counsel for the respondent were rendered under the direct tax laws and related to the concept of beneficiary for the purpose of income-tax assessment where the accrual of income or the right to receive the corpus would be a crucial test. Quite to the contrary, the real issue here is whether the third respondent as a trustee can claim that his earlier declaration that he was not the beneficial owner of the shares has become untenable because of extinguishment of the trust by operation of law. As pointed out by learned counsel for the petitioners, the third respondent in his oral evidence had admitted that if 15 1/2 per cent. of the shares held by the trust were sold at even 60 per cent. of its face value, it would have fetched about a crore and seventy three lakh rupees. Another admission by him was that the balance-sheets of AMF show only an amount of Rs. 10,09,000 as due from the trust and no money is shown to be owed by him after assuming the shares held by the trust in his own name. The outstanding amount of interest was also written off by the company. In the circumstances, it is not possible to accept the claim of the third respondent that the trust had become extinguished by operation of law particularly when it is demonstrated by the petitioners that in fact there is no outstanding liability at present exceeding the intrinsic value of the shares. Hence, my finding on this issue is that there was no extinguishment of the trust and in fact, there cannot be any extinguishment of the trust by operation of law.
Issue No. 2. - As discussed above, the provisions of section 83 come into operation only if there is an extinguishment of trust under section 77. Since I have found that there is no extinguishment of the trust, there is no question of reversion of the trust property to the author. More significantly, the trust property which was declared in the deed was only the sum of Rs. 1,116. The shares were actually purchased with borrowed funds and the shares form part of the corpus of the trust but did not originally belong to the author of the trust. As long as the shares exist and form part of the corpus of the trust, there is liability on the part of the trustees to hold it for the benefit of the beneficiaries. Since the trust is declared to be irrevocable, the interest of the author has ceased according to the declaration of the trust and he has no right except in terms of section 83 to get back any part of the corpus of the trust even assuming that the shares subsequently purchased by borrowed funds would be declared as property of the trust by the author. It follows that no part of the trust can be treated as the property of the third respondent and he cannot declare any beneficial interest in the property for himself. This conclusion, however, does not lead to the inference that the petitioners are the owners of the shares. The petitioners are entitled only to the distribution of income as and when given. They have no right to receive the corpus. Only the heirs of the first, fourth, fifth and sixth petitioners are entitled to the corpus on the last of them attaining majority. Hence, it is not possible to declare the petitioners as owners of the shares for even if the third respondent is recorded as a trustee the shares would continue to be trust property and whoever holds it has to hold it only as a trustee and not as beneficial owner until the time for distribution of the corpus arrives. In any event, section 155 provides only for rectification of an entry in the register of members and cannot permit a declaration of title except as a step in the process of deciding whether there is an error requiring rectification. Hence, my finding on this issue is in the negative and against the petitioners.
Issue No. 4. - The accepted position is that the original declaration was given by the third respondent within the meaning of section 187C and the original entry in the register of members read as follows :
"Sri Anam Venkata Reddi, Chairman, Anam Venkata Reddi Family Trust, Kadiyam."
10. After the execution of the extinguishment deed, the entry was changed to read as follows :
"Transmitted to Sri A.V. Reddi (individual) on extinguishment of the trust."
11. The respondent claims in his counter-affidavit that he had made declaration under section 187C(3) and that was the reason why this change was effected. However, even if a declaration is made and the third respondent claimed that the trust had become extinguished, the entry in the register cannot be changed unless the matter is considered by the board of directors. The articles of association of the first respondent-company provided for registering transfers of shares only by resolution of the board. In the case of transmission by devolution by inheritance of shares also, the board of directors have the power to call on the executors of the deceased member to transfer the shares to a named person. In an unreported decision of the Madras High Court in the case of V.G. Sundararaj v. New Theatre Carnatic Talkies Private Limited (O.S.A. No. 62 of 1982, dated January 18, 1991), it was held that where there was a decree for specific performance to register a share transfer, the register of members cannot be altered without following the procedure of the matter being considered by the board of directors. I am of the opinion the even if section 187C(4) provides that where a declaration is made under sub-section (1), (2) or (3), the company shall make a note of such declaration in its register of members, the matter would have to be placed before the board of directors for acceptance. Where a shareholder declares that he does not hold beneficial interest, that declaration is against his interests and can, therefore, be accepted on its face value. But, when the same shareholder declares subsequently that the beneficial interest is reverted back to him, the principles of natural justice would require that the persons whose names have been registered as having beneficial interests must be notified and their objections taken before recording the declaration under sub-section (3). Even though the section does not provide for such an opportunity, or consideration by the board of directors, I am of the opinion that the principles of natural justice, by necessary implication, form part of the process, and by merely recording a declaration made under section 187C(3), the beneficial interest in others which is declared earlier by the same holder of the shares, cannot be wiped off. Courts have held that the principles of natural justice are attracted and there is an implied obligation to give notice even though the relevant Act or rules made no express provision for it, wherever the rights of a person are affected by a proposed action under the statute (see H.M. Seervai's Constitutional Law of India, para. 16.537, at page 1759). Admittedly, the matter was never placed before the board of directors.
12. Learned counsel for the respondent submitted that the matter was not required to be placed before the board meeting since it was not a case of transfer but only a case of extinguishment by operation of law. I have already held that there was no extinguishment at all. It was further stated that under section 297(5), matters required to be placed before the board would only be voidable and not void if omitted to be placed before the board. Even on the same analogy, a matter which affects the rights of the shareholders if it had not been placed before the board would be open to be questioned by the shareholders. The argument of learned counsel for the respondent that none of the income beneficiaries had any subsisting rights and none of the corpus beneficiaries had any present rights and therefore, they were not the persons affected so as to be given notice of the change in the entry, is also untenable. Under section 155, any member can apply for rectification and the issue is not only of the ownership but also of the voting rights, for if the existence of the trust is accepted by the company, then the voting rights of the trust can be exercised by the public trustee to see that the other members of the company are treated fairly in the functions of the company. Hence, I am convinced that before recording a change under section 187C(3), the other members of the company were entitled to notice.
13. Looking into the provisions of section 155, it is seen that if the name of a person after having been entered in the register is without sufficient cause omitted therefrom, it would be a matter for rectification. In the present case, in view of my finding that the trust was not extinguished and the beneficial interests in the shares did not revert to the author, viz., the third respondent, the omission of the earlier declaration regarding the beneficial interest of the petitioners is without sufficient cause. Moreover, the fresh entry made was to the effect that there was transfer by operation of law. That statement, as a I have found earlier, is erroneous inasmuch as there could not be any extinguishment by operation of law under section 77 of the Trusts Act as claimed in the extinguishment deed. Thus, it has been established by the petitioners that the subsequent entries made in the register of members constitute an error and required to be deleted so that the original entry is restored and maintained. I, therefore, order the petition in terms of the amended prayer (d) and (e) by directing the first respondent to rectify the entries newly made at folios 38 and 39 by deleting the words "transmitted to A.V. Reddi (individual) on extinguishment of the trust" and, consequently, the original entries of folios 38 and 39 shall remain intact. In the circumstances of the case, no order as to costs.