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2020 (9) TMI 128 - HC - Companies LawDividend declared but not claimed for more then 7 years - the petitioner is an 81 year old woman who was not aware even about the existence of the shares until recently on 2019 - the shares were acquired by her son who died on 1993 - transfer of such amount to Investor Education and Protection Fund (IEPF) - Validity of of Section 124 (6) of the Companies Act, 2013 and Rule 6 and 7 of the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016 - violative of Article 14, 21 and 300 A of the Constitution of India or not - It is the contention of the petitioner that Section 124 of the Companies Act, 2013 corresponds to Section 205 A of the Companies Act, 1956 - It is the contention of the petitioner that failure to claim dividends cannot amount to divesting the rights in the shares which is property. HELD THAT - In the instant case, the petitioner is an 81 year old woman who was not aware even about the existence of the shares until recently on 2019. Since the shares were acquired by her son who died on 1993 in Oman, the petitioner had no way of knowing the shares on her own. Therefore, the shares were dormant for more than 7 years and in such a case, the shares are also unreasonably transferred to IEPF where the shareholder had actually died and the claimants were unaware of their existence. The procedure for transfer of shares is onerous as the Claimant/legal heir of the claimant is forced to undergo an ordeal of procedure to get back their own property. The procedure given under the Rules after the amendment is not in conformity with the substantial due process and fairness, as mentioned above, the Section and the Rules are manifestly arbitrary - Neither the Section nor the rules provide for any checks and balances and effective adjudicative mechanism through which its civil right in shares can be divested. It is an essential facet of law and matter of fundamental policy in India that a person, whose rights are affected, ought to be heard. Therefore, the lack of such opportunity and effective mechanism by itself renders the section and the rules arbitrary and unconstitutional. A time limit of 7 years was imposed for claiming any dividend due to a shareholder, after which the money would instead be used by the IEPF, for fulfilling its various objectives. Parliament in its infinite wisdom felt that money owed to careless shareholders ought to be put to good use, i.e. used for the purposes of the IEPF. In this manner, the right of the shareholder, to recover dividend in respect of his forgotten investments was curtailed. A shareholder could only recover dividend for upto 7 years, from the date on which he made an application to the company. The present Petition seeks to challenge, Section 124(6) of the 2013 Act, and the rules made thereunder. It is the case of the Petitioner, that the provisions related to the transfer of shares to the IEPF, i.e. 124(6), and the rules made thereunder, deprive a person of their right to property and are violative of Article 300-A of the Constitution of India. It is further the case of the Petitioner that the provision and the rules made thereunder, are onerous and are manifestly arbitrary - It is settled law that Article 300-A ensures that no person shall be deprived of their property, except in accordance with law. The protection offered under this Article ensures that an executive fiat cannot result in the deprivation of property, and that law must be made by the appropriate legislature, to deprive a person of their property. Article 300A, is attracted to those situations where the property of a person is acquired only by an executive fiat, and not on the basis of any law, validly made. It is the case of the Petitioners that the impugned provisions deprive them of their property, and are violative of Article 300-A of the Constitution of India. This argument is liable to be rejected because there is no actual deprivation of property taking place. There is no doubt that as a result of the impugned provisions, the shares on which dividend is unclaimed for more than 7 years are to be transferred to the IEPF, but that does not amount to deprivation of property.This is for two reasons. Firstly, under Section 124(6), there is no statutory vesting of the shares so transferred to the IEPF. Section 124(6), only contemplates a transfer of shares to the IEPF, and does not confer ownership of the shares on IEPF. This position is reflected in the proviso to Setion 124(6), which provides that a person shall always be permitted to re-claim his shares, from the IEPF. Secondly, the Rules prescribed under Section 124(6), provide for a procedure for the refund of the shares so transferred to the IEPF.Rule 7, of the IEPF Rules, 2016 a procedure is prescribed for the refund of the shares by the IEPF to the owner of the shares. Thus, no deprivation of property is taking place, under the Impugned Provisions, and as such Article 300-A is not attracted in this case. Petition dismissed.
Issues Involved:
1. Constitutionality of Section 124(6) of the Companies Act, 2013. 2. Constitutionality of Rule 6 and 7 of the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016. 3. Violation of Articles 14, 21, and 300A of the Constitution of India. Detailed Analysis: 1. Constitutionality of Section 124(6) of the Companies Act, 2013: The petitioner challenged Section 124(6) of the Companies Act, 2013, arguing that it is unconstitutional as it violates Article 300A of the Constitution of India. The petitioner contended that the provision, which mandates the transfer of shares to the Investor Education and Protection Fund (IEPF) if dividends are unclaimed for seven consecutive years, results in the deprivation of property without due process. The petitioner argued that shares are a form of property and their transfer to IEPF without the shareholder's consent is arbitrary and lacks public purpose. The court, however, held that Section 124(6) does not result in the deprivation of property as the shares are not statutorily vested in the IEPF but are merely transferred, allowing the shareholder to reclaim them. The court concluded that the provision is in accordance with law and does not violate Article 300A. 2. Constitutionality of Rule 6 and 7 of the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016: The petitioner argued that Rules 6 and 7 are cumbersome and make it virtually impossible to comply with the procedure for reclaiming shares and dividends transferred to the IEPF. The petitioner highlighted that the rules require legal heirs to submit extensive documentation, including succession certificates, which impose additional expenses and delays. The court, however, held that the rules are designed to ensure that only genuine claims are entertained and that the procedure, although onerous, does not make the rules unconstitutional. The court emphasized that the rules are preventive and not curative, aiming to prevent companies from unjustly enriching themselves from unclaimed dividends. 3. Violation of Articles 14, 21, and 300A of the Constitution of India: The petitioner contended that Section 124(6) and the corresponding rules are violative of Articles 14, 21, and 300A of the Constitution of India. The petitioner argued that the provisions are arbitrary and lack a rational basis, thereby violating the right to equality under Article 14. The petitioner also argued that the provisions deprive shareholders of their property without due process, violating Article 21 and 300A. The court, however, held that the provisions serve a public purpose by ensuring that companies do not profit from unclaimed dividends and that the rules are designed to protect the interests of genuine claimants. The court concluded that the provisions are not manifestly arbitrary and do not violate the fundamental rights guaranteed under the Constitution. Conclusion: The court dismissed the writ petition, upholding the constitutionality of Section 124(6) of the Companies Act, 2013, and Rules 6 and 7 of the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016. The court held that the provisions do not violate Articles 14, 21, and 300A of the Constitution of India and serve a legitimate public purpose. The court emphasized that the rules are designed to ensure that only genuine claims are entertained and that the procedure, although onerous, does not make the rules unconstitutional. The court also noted that the provisions are preventive and not curative, aiming to prevent companies from unjustly enriching themselves from unclaimed dividends.
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