2001 (3) TMI 960 - HC - Companies Law

Summary

Issues Involved:
1. Validity of the restriction on transfer of shares as per Article 7 of the Articles of Association.
2. Applicability of restrictions on share transfer in the context of a court auction sale.
3. Rights of auction purchasers in relation to company shares subject to transfer restrictions.

Issue-wise Detailed Analysis:

1. Validity of the restriction on transfer of shares as per Article 7 of the Articles of Association:
The defendant-company's Articles of Association, specifically Article 7, prohibits the transfer of shares to non-shareholders and requires transfers to be made only among existing members of the company. This article also mandates prior sanction from the directors for any transfer and allows them to decline without assigning reasons. The court noted that the transfer of shares is permitted only among the shareholders of the company inter se, implying a prohibition on transferring shares to non-shareholders.

2. Applicability of restrictions on share transfer in the context of a court auction sale:
The plaintiff argued that restrictions on share transfers do not apply to court auction sales, citing precedents from the Madras High Court (Soma Veerappa v. Muthurasappa Chettiar) and the Calcutta High Court (Mahadeo Lal Agarwala v. New Darjeeling Union Tea Co. Ltd.). However, the defendant contended, supported by the Nagpur High Court (Abdul Rashid Hafizdin Hohammad v. Commissioner of Sales Tax) and Bombay High Court (Manilal Brijalal v. Gordhan Spg. and Mfg. Co.), that a court auction sale does not override the restrictions in the Articles of Association.

The court held that shares are movable property and their transfer is governed by Section 82 of the Companies Act, 1956, which states that shares are transferable in the manner provided by the articles of the company. The court emphasized that the restrictions on transfer continue to apply even after a court auction sale.

3. Rights of auction purchasers in relation to company shares subject to transfer restrictions:
The court examined the procedures under Order 21, Rules 79 and 80 of the Civil Procedure Code, which govern the delivery and transfer of shares sold in execution of decrees. It was clarified that these rules do not enlarge the judgment-debtor's rights or remove any pre-existing restrictions on transfer. The court referenced judgments from the Bombay and Nagpur High Courts, which held that an auction purchaser acquires the same limited rights as the original shareholder, subject to the company's Articles of Association.

The court concluded that the auction purchaser does not gain an absolute right to have the shares transferred and registered in their name. The intervention of the court and the compulsory nature of the sale do not prejudice the company's rights or alter the purchaser's position regarding transfer restrictions.

Conclusion:
The court dismissed the appeal, affirming that the restrictions in Article 7 of the Articles of Association remain applicable even in the case of a court auction sale. The company was within its rights to refuse the transfer and registration of the shares purchased by the plaintiffs, as the court sale did not remove the pre-existing transfer restrictions. The trial judge's failure to distinguish between the nature of rights passing in a court sale and the company's discretion under its Articles of Association led to an erroneous decree, which the appellate court rightly reversed. The appeal was dismissed with no costs.