1940 (7) TMI 16 - HC - Companies Law

General provisions with respect to memorandum and articles - Effect of memorandum and articles, Shares warrants and entries in register of members and Power of court to rectify register of members

Issues:
1. Shareholder petition under section 38(1) of the Companies Act for rectification of the register.
2. Validity of expulsion of shareholder from membership under Article 173 of the Articles of Association.
3. Alteration of Articles enabling forced sale of shares.
4. Legality of the alteration in Articles regarding transfer of shares.
5. Interpretation of section 34(3) of the Companies Act.
6. Effect of expulsion resolution on shareholder's membership and shareholding.
7. Compliance with section 38(1) regarding the omission of shareholder's name from the register.
8. Inclusion of transferee as a party in the petition.

Analysis:
1. The petitioner, a shareholder of the Canara Banking Corporation, Ltd., filed a petition under section 38(1) of the Companies Act seeking rectification of the register due to his expulsion from membership by the Company under Article 173 of the Articles of Association.

2. The Company expelled the petitioner from membership based on Article 173, which allowed expulsion for resorting to law against the Corporation. However, the Court found that the Company lacked the power to expel a shareholder and seize or deprive them of their share without proper provisions in the Articles.

3. Subsequent to the expulsion, the Company altered its Articles to enable the forced sale of shares of expelled members. The Court noted that such an alteration, made without notifying the petitioner, could not be binding on him as it changed the contractual terms between the shareholder and the Company.

4. The Court analyzed the legality of the altered Articles regarding the transfer of shares, highlighting the requirement of a proper instrument of transfer under section 34(3) of the Companies Act. The provision in the Articles allowing directors to transfer shares without such an instrument was deemed ultra vires of the Act.

5. Regarding the interpretation of section 34(3) of the Companies Act, the Court emphasized the necessity of a valid instrument of transfer for share registration, except in specific circumstances like Court sales.

6. The Court determined that the petitioner, as a shareholder, remained a member of the Company despite the expulsion resolution, which had no legal effect. Consequently, the Company could not compel the petitioner to transfer his share or authorize a transfer on his behalf.

7. In addressing the compliance with section 38(1) of the Companies Act, the Court held that the striking out of the petitioner's name from the register constituted an omission, necessitating rectification to include him as a member.

8. Lastly, the Court dismissed the Company's argument regarding the inclusion of the transferee as a party, ruling that no valid transfer had occurred, and directed the Company to rectify the register by adding the petitioner's name as a shareholder, restoring him to his original position. The petitioner was awarded costs, including out-of-pocket expenses, totaling Rs. 150.

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