1989 (11) TMI 272 - HC - Companies Law

Summary

Issues Involved:
1. Legality of the transfer of shares by directors/shareholders.
2. Jurisdiction of the first respondent to prevent share transfers.
3. Allegations of mala fides in the approval of share transfers.
4. The applicability of Article 226 for disputes involving private parties.

Detailed Analysis:

1. Legality of the Transfer of Shares by Directors/Shareholders:
The petitioners, who are shareholders/directors in Sree Ayyanar Spinning and Weaving Mills Ltd., sought a writ of mandamus to prevent the transfer of shares to non-shareholders. The second respondent-company had obtained a loan from the first respondent, and the directors had undertaken not to transfer their shares without the first respondent's approval. Despite this, some directors/shareholders sought and received approval from the first respondent to transfer their shares to third parties. The court noted that the transfer of shares had already been effected with the first respondent's approval before the writ petitions were filed, rendering the petitions infructuous.

2. Jurisdiction of the First Respondent to Prevent Share Transfers:
The court addressed the preliminary objection that the first respondent could not be mandated to prevent share transfers. The first respondent's jurisdiction was limited to ensuring compliance with the agreement between it and the second respondent-company. If a transfer was effected without the first respondent's approval, the first respondent could claim a violation of the agreement but could not invalidate the transfer. Therefore, the court could not issue a mandamus to stop the transfer of shares.

3. Allegations of Mala Fides in the Approval of Share Transfers:
The petitioners alleged that the first respondent's approval of the share transfers was influenced by mala fides, particularly due to the influence of the third respondent. However, the court found that the affidavits lacked sufficient particulars to substantiate these claims. The court emphasized that unless it was demonstrated that the interests of the first respondent or the second respondent-company were prejudiced by the approval, no inference of mala fides could be drawn. The court also rejected the argument that the first respondent's approval released some directors from their liability under the loan agreement, noting that the first respondent's primary concern was safeguarding its interests in loan recovery.

4. The Applicability of Article 226 for Disputes Involving Private Parties:
The court referred to the Supreme Court's observations in LIC of India v. Escorts Ltd., highlighting that State instrumentalities, when acting as shareholders, have the same rights as private shareholders. The court reiterated that Article 226 is not a forum for resolving disputes between private parties. The real dispute was between the petitioners and other shareholders, not involving any public law element that would warrant judicial review under Article 226. The petitioners' claim of a right of pre-emption based on family conventions needed to be established in an appropriate forum, not through writ petitions.

Conclusion:
Both writ petitions were dismissed with costs, as the court found no grounds to issue a mandamus to the first respondent or to entertain the petitions under Article 226. The court emphasized that the dispute was essentially a private matter between shareholders, unsuitable for resolution through writ jurisdiction.