2001 (2) TMI 923 - HC - Companies Law

Summary

Issues Involved:
1. Legality of the amendment to the Articles of Association.
2. Compliance with Section 108 of the Companies Act, 1956.
3. Bona fide nature of the decision to cancel the membership of the respondent.

Analysis:

1. Legality of the Amendment to the Articles of Association:
The appellants amended the Articles of Association to introduce Articles 16A, 16B, and 16C, which allowed the Board of Directors to refuse the registration of share transfers and to compulsorily transfer shares of a member if decided by 90% of shareholders. The respondent argued that these amendments were made without proper notice and were illegal as they interfered with her right to hold shares.

The judgment clarified that under Section 31 of the Companies Act, a company could alter its articles by a special resolution. The Supreme Court in *Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd.* held that the articles of association are in the nature of a contract between the company and its members. Therefore, the amendments, if made in accordance with the Act, are valid. The judgment also referenced *Sidebottom v. Kershaw*, which allowed such provisions in the original articles, implying that amendments to include such provisions are also permissible.

2. Compliance with Section 108 of the Companies Act, 1956:
The CLB held that the transfer of the respondent's shares was in contravention of Section 108, which requires a proper instrument of transfer executed by the transferor and transferee. The appellants argued that under Section 108, the instrument could be executed "by or on behalf of the transferor," and in this case, a director executed the transfer deed as authorized by the articles.

The judgment differentiated this case from *Madhava Ramachandra Kamath v. Canara Banking Corpn. Ltd.*, where the Madras High Court held a similar provision invalid under Section 34 of the Indian Companies Act, 1913. Section 108 of the Companies Act, 1956, however, allows execution "by or on behalf of the transferor," making the appellants' action compliant with the law. Therefore, the CLB's decision on this ground was found to be incorrect.

3. Bona fide Nature of the Decision to Cancel the Membership of the Respondent:
The CLB did not address whether the decision to cancel the respondent's membership was bona fide. The judgment emphasized that such compulsory transfers must be in the company's interest, not just for the benefit of some shareholders. The explanatory statement under Section 173(2) cited various complaints made by the respondent and her husband as reasons for the expulsion, but there was no evidence that these complaints resulted in tangible damage to the company.

The judgment referenced *Sidebottom v. Kershaw*, which stated that alterations must not sacrifice the minority's interests without any reasonable prospect of advantage to the company as a whole. The court found no material evidence that expelling the respondent would benefit the company. Therefore, the decision to cancel the respondent's membership was not bona fide and was deemed illegal.

Conclusion:
The appeal was dismissed. The court upheld the CLB's decision to restore the respondent's name in the Register of Members, as the amendments to the Articles of Association were legally valid, but the execution of the transfer was compliant with Section 108, and the decision to cancel the membership was not bona fide.