1983 (12) TMI 243 - HC - Companies Law

General provisions with respect to memorandum and articles - Effect of memorandum and articles, Powers of Court to rectify register of members, Meetings and proceedings - Explanatory statement to be annexed to notice

Issues Involved:

1. Competence of the petitioners to challenge the validity of Article 24 (as amended in 1965) of the first respondent-company's articles of association.
2. Validity of Article 24 (as amended in 1965).

Detailed Analysis:

1. Competence of the Petitioners to Challenge the Validity of Article 24:

The appeals were filed under sub-section (4) of section 155 of the Companies Act, 1956, challenging the decision of the company to refuse registration of share transfers based on Article 24 of the articles of association. The petitioners sought rectification of the register of members to include their names as shareholders. The company had refused the transfers citing Article 24, which allowed the board to decline registration without assigning reasons.

The court held that the petitioners were not competent to challenge the validity of Article 24 in the proceedings before the company court. The court emphasized that the articles of association, once registered, bind the company and its members as per section 36 of the Act. The court also noted that the explanatory statement under section 173(2) to the notice of the special resolution for the 21st annual general meeting was scrutinized but found no substantial defect that would render the amendment invalid. The court concluded that the petitioners, as transferees, could not challenge the validity of the amendment when the original shareholders themselves were barred by limitation from doing so.

2. Validity of Article 24 (as amended in 1965):

Article 24, as amended in 1965, allowed the board of directors to refuse registration of share transfers without assigning any reason. The substantial difference between the old regulation 20 and the new regulation 24 was that the latter applied to fully paid shares as well. The petitioners argued that the explanatory statement under section 173(2) was insufficient, thus rendering the amendment invalid.

The court examined the explanatory statement and noted some defects but did not find them significant enough to invalidate the amendment. The court referred to legal precedents, including the Gujarat High Court's decision in Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd., which emphasized the mandatory nature of section 173. However, the court held that a minor defect in the explanatory statement would not render the amendment null and void.

The court also cited Gore-Browne's Handbook on Joint Stock Companies, which states that long-standing practices and articles, even if not formally adopted, can be recognized as valid. The court found no reason to declare the articles of association, including Article 24, void, especially given the passage of time and the numerous transactions conducted under the amended articles.

The court concluded that the scope of an enquiry under section 155 does not extend to scrutinizing the validity of long-standing amendments to the articles of association. The court emphasized that the articles registered with the Registrar of Companies are binding on the company and shareholders, and the directors were within their rights to refuse the transfer of shares without assigning reasons.

Conclusion:

The appeals were dismissed, and the court upheld the decision that the petitioners were not competent to challenge the validity of Article 24. The court also found no substantial reason to invalidate the amendment made in 1965. The request for leave to appeal to the Supreme Court was declined as the matter did not involve any substantial question of general importance.

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