1982 (1) TMI 160 - HC - Companies Law

General provisions with respect to memorandum and articles - Effect of memorandum and articles, Alteration of rights of holders of special classes of shares

Summary

Issues:
Petition under sections 106 and 107 of the Companies Act to restrain respondent-company from amending articles 70(a) and 97 of its articles of association without petitioner's consent.

Analysis:
The High Court of Karnataka was approached with a petition seeking to restrain a company from amending specific articles of its association without the petitioner's consent. The respondent company argued that the proposed amendments did not affect the rights of any class of shareholders and that the company had the statutory right to amend its articles. The main contention was that the petition aimed to restrict the company's statutory right to amend its articles. The court issued an emergent notice and stayed the operation of any resolution passed at the general meeting related to the proposed amendments.

The company, incorporated in 1938, had issued right shares in 1980, resulting in a change in the shareholding pattern. The Government, the petitioner, did not act on the offer, leading to a shift in the capital ratio between the Government and other shareholders. This change necessitated the amendment of articles 70(a) and 97 of the company's articles of association. These articles pertained to the State Government's right to nominate directors and the chairman of the board. The court noted that these rights were based on contractual obligations and not directly linked to the shares held by the Government.

Sections 106 and 107 of the Companies Act allow shareholders to challenge alterations affecting their class of shares. The court highlighted the specific rights attached to different classes of shares, emphasizing that the proposed amendments did not impact these rights. It was established that the Government's nomination rights were not tied to any specific class of shares, making the petition not maintainable under these sections. Section 31 of the Act permits companies to alter their articles by special resolution, subject to certain restrictions.

The court concluded that the Government could not invoke the court's protection to maintain a state of affairs no longer warranted by the shareholding pattern. Given the reluctance of other shareholders to uphold the existing provisions, the court held that the petition was not maintainable under sections 106 or 107 of the Act. No other provision was pointed out to support the petition, leading to its dismissal with no order as to costs.