2019 (8) TMI 221 - AT - Companies Law

Oppression and mismanagement - Section 241-242 of the Companies Act, 2013 - preemptive right of having notice of proposed transfer of shares incorporated in Article 7 of the Articles of Association - HELD THAT - These provisions are intended to block an outsider from purchasing the shares of a private company through the mode of sale or transfer by any other mode and for achieving this objective these Articles envisage that a stranger/ third party may be allowed to purchase the shares of the company only after the existing shareholders have been given the option to purchase the shares intended to be sold and the existing shareholders/ members have declined to purchase the shares offered for sale. This is the general principle - However, an exception is carved out under Article 8 by providing that previous sanction from Board of Directors would not be required if the sale of shares is made in favour of an existing member/ members, their spouses, children or legal heirs. Admittedly, this case falls within the aforesaid exception. Further, that the alteration of balance of power as a sequel to the transfer of shareholding by a member in favour of an existing member would be a concept alien to the true scope and ambit of these Articles. This is apart from the fact that on facts the Tribunal has not found any material alteration on the aspect of balance of power and such finding is not shown to be erroneous, much less perverse. The impugned order does not suffer from any legal infirmity or factual frailty. The interpretation placed on the language of Article 7 and 8 of the Articles of Association of Respondent No. 1 Company by the Tribunal is perfectly in consonance with the settled position of law - Appeal dismissed.

Issues Involved:
1. Alleged oppression and mismanagement under Sections 241-242 of the Companies Act, 2013.
2. Interpretation and application of Articles 7 and 8 of the Articles of Association (AOA) concerning the transfer of shares.
3. Validity of the transfer of shares without prior notice to existing shareholders.
4. Whether the transfer of shares required prior approval from the Board of Directors.

Detailed Analysis:

1. Alleged Oppression and Mismanagement:
The appellants, who are shareholders holding 21.99% equity in the respondent company, alleged oppression and mismanagement by the respondents (Directors) under Sections 241-242 of the Companies Act, 2013. The appellants claimed that the respondents ignored them, withheld financial statements and statutory records, and did not notify them of meetings, including the Annual General Meeting (AGM) for the year 2014-15. The appellants contended that the transfer of shares ratified in the AGM on 19.09.2015 was in violation of Article 7 of the AOA, which mandates notifying the Board of Directors and offering the shares to existing shareholders before any transfer.

2. Interpretation and Application of Articles 7 and 8 of the AOA:
Article 7 of the AOA requires a member desiring to sell shares to notify the Board of Directors, who must then offer the shares to other shareholders at a fair value. If the offer is not accepted within one month, the member can sell the shares to any person. Article 8(1) states that no transfer of shares shall be made without the previous sanction of the Directors, except when the transfer is made to another member or a member’s spouse, child, or heirs. The appellants argued that Article 7's preemptive right applies to all transfers, including those to existing members, and that the Tribunal erred in interpreting it as only regulating the entry of outsiders.

3. Validity of the Transfer of Shares without Prior Notice:
The appellants contended that the transfer of shares ratified on 19.09.2015 was a subterfuge, as the transfer had already been approved on 20.12.2014 without notifying them, violating Article 7 of the AOA. The respondents argued that the transfer was governed by Article 8(1) since it was an inter-se transfer among members, which does not require prior notice or sanction from the Board of Directors.

4. Whether the Transfer of Shares Required Prior Approval from the Board of Directors:
The Tribunal found that the transfer of shares among existing members did not require prior approval from the Board of Directors under Article 8(1). This interpretation was supported by the Karnataka High Court's rulings in "Mukundlal Manchanda Vs. Prakash Roadlines Ltd." (1991 SCC online Kar 131 and 1996 87 Compcas 102 (kar)), which held that Articles 7 and 8 operate independently. Article 7 applies to transfers to outsiders, while Article 8 allows transfers among existing members without Board approval, thereby not triggering the preemptive rights under Article 7.

Conclusion:
The Appellate Tribunal upheld the Tribunal's interpretation of Articles 7 and 8, concluding that the transfer of shares among existing members did not violate the AOA and did not constitute oppression or mismanagement. The impugned order was found to be in consonance with the settled legal position, and the appeal was dismissed for lack of merit. The Tribunal also noted that any alteration in the balance of power due to share transfers among existing members was not a concern under the scope of these Articles.

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