1996 (7) TMI 476 - HC - Companies Law

Summary

Issues Involved:
1. Legality of the share transfers approved in the board meeting held on 30-06-1995.
2. Compliance with the Articles of Association regarding the transfer of shares.
3. Validity of the agreement dated 20-12-1984 between defendant No. 1 and defendant No. 2.
4. Plaintiffs' entitlement to an interim injunction restraining the exercise of rights over the transferred shares.

Detailed Analysis:

1. Legality of the Share Transfers Approved in the Board Meeting Held on 30-06-1995:
The plaintiffs contested the legality of the share transfers approved during the board meeting on 30-06-1995, asserting that these transfers were illegal, ultra vires, and void. They argued that the transfers violated the Articles of Association of the company, specifically Article 13, which mandates that shares intended for transfer must first be offered to existing shareholders in proportion to their holdings.

The defendants countered that the transfers were conducted in accordance with a buy-back agreement dated 20-12-1984, which stipulated that defendant No. 1 would transfer its shares to the promoters (defendant Nos. 3 to 5) after a five-year embargo period. The court noted that plaintiff No. 1 was present at the meeting and did not object to the transfers, which were unanimously approved and registered by the board.

2. Compliance with the Articles of Association Regarding the Transfer of Shares:
The plaintiffs argued that the transfers violated Article 13 of the Articles of Association, which requires that shares intended for sale be offered to existing shareholders in proportion to their holdings. The court examined Article 13, which states: "A member intending to sell any shares shall give notice of his intention to do so to the directors who shall offer such shares to all the members in proportion to their respective holding in the company..."

The defendants argued that Article 13 was not applicable due to the specific terms of the buy-back agreement, which took precedence. The court found that the plaintiffs had not raised any objections to the agreement from 1992 to 1995, despite being aware of it and having been inducted as shareholders.

3. Validity of the Agreement Dated 20-12-1984 Between Defendant No. 1 and Defendant No. 2:
The plaintiffs contended that the agreement dated 20-12-1984 violated Articles 13 and 14 of the Articles of Association. However, the court noted that the plaintiffs, having been shareholders since 1992, did not challenge the agreement until the present suit. The court found that the plaintiffs' failure to object earlier weakened their case.

The court also referred to Article 5 of the Articles of Association, which grants the directors control over the allocation and disposal of shares, and Article 10, which outlines the procedure for registering share transfers. The court concluded that the board of directors acted within their powers as per the Articles of Association and the buy-back agreement.

4. Plaintiffs' Entitlement to an Interim Injunction Restraining the Exercise of Rights Over the Transferred Shares:
The plaintiffs sought an interim injunction to restrain the defendants from exercising voting rights or any other rights over the transferred shares during the pendency of the suit. The court examined whether the plaintiffs had established a prima facie case, whether the balance of convenience was in their favor, and whether irreparable loss and injury would result if the injunction was not granted.

The court found that the plaintiffs had not established a prima facie case, as they had not objected to the agreement or the share transfers in earlier meetings. The balance of convenience did not favor the plaintiffs, as granting the injunction would nullify the already effected transfers and complicate the company's management. The court also noted that no irreparable loss or injury would result if the injunction was not granted, as the plaintiffs could seek relief under Sections 397 and 398 of the Companies Act if they felt oppressed as minority shareholders.

Conclusion:
The court declined the plaintiffs' request for an interim injunction, finding that they had not established a prima facie case, the balance of convenience did not favor them, and no irreparable loss or injury would result from denying the injunction. The application for interim injunction was dismissed, with no order as to costs. The court clarified that its observations would not affect the ultimate decision of the suit.