2016 (3) TMI 122 - HC - Companies Law

Transfer of shares - Transfer of assets and liabilities between a transferor and transferee company in the case of amalgamation - whether transfer of assets in the case of a scheme of amalgamation between transferor and transferee companies is a voluntary transfer and not an involuntary transfer by operation of law? - Held that - A proper reading of the Articles seems to be that any transfer of shares occasioned by a scheme of amalgamation sanctioned by the court is not a transfer of shares within the meaning of Article 21 to 38 but a case of under Article 39 of transmission of shares by any lawful means other than by transfer in accordance with the earlier Articles. After all the transmission clause contained in Article 39 does not necessarily apply to the case of an involuntary transfer which is by operation of law. It rather provides for a case where the entitlement of any person to the shares arises on account of any lawful means other than by transfer in accordance with the foregoing Articles. Such transmission merely requires production of evidence that the claimant sustains the character in respect of which he proposes to act under Article 39 or has the requisite title. In other words, all entitlements to shares other than by virtue of transfers in pursuance of Articles 21 to 38 are covered by Article 39 and must abide by it. Even if its case be covered under the transmission clause of Article 39, it can be registered as a member in respect of the shares only with consent of the Directors. The Directors are not under any obligation to give such consent. If the Directors refuse to give such consent, the first Respondent would be free to invoke the regulations which apply to transfer of shares. Accordingly, the CLB had to give an option to the Board of Directors of the Appellant to register the first Respondent as a member or in the alternative, to purchase the shares through any purchasing member or otherwise at a fair value to be determined by the auditors of the company within the meaning of Article 25. Accordingly, whilst the findings of CLB in the impugned order are not disturbed, the operative order passed by CLB is modified by substituting Clause C of para 21 of the impugned order by the following clause C The Appellant company at its option shall either register the first Respondent as a shareholder in its register of members or allow the first Respondent to sell 1980 shares held by the first Respondent in accordance with the Articles of Association to a person named by the first Respondent or buy the said shares through a purchasing member at a fair value to be determined by the auditors of the Appellant company in accordance with Article 25. Such option shall be exercised within 28 days from today.

Summary

Issues Involved:
1. Validity of the transfer of shares under a scheme of amalgamation.
2. Applicability of pre-emption rights under the Articles of Association.
3. Classification of the transfer as 'transfer of shares' or 'transmission of shares'.
4. Reliefs and directions provided by the Company Law Board (CLB).

Detailed Analysis:

1. Validity of the Transfer of Shares under a Scheme of Amalgamation:
The appeal challenges the order of the Company Law Board (CLB) which allowed the first Respondent's petition under Section 111 of the Companies Act, 1956. The CLB declared the first Respondent to be the owner of 1980 shares of the Appellant company and directed rectification of the register of members accordingly. The transfer of shares occurred due to a court-sanctioned scheme of amalgamation, which transferred all assets and liabilities of Jayalaxmi Holdings Pvt. Ltd. (JHPL) to the first Respondent, including the subject shares.

2. Applicability of Pre-emption Rights under the Articles of Association:
The Appellant rejected the transfer application, citing a breach of the Articles of Association that provide for a right of pre-emption. Articles 21 to 43 of the Appellant's Articles of Association govern the transfer and transmission of shares. Article 22 restricts share transfers unless pre-emption rights are exhausted. The Appellant contended that the transfer under the amalgamation scheme was a voluntary transfer and thus subject to pre-emption rights.

3. Classification of the Transfer as 'Transfer of Shares' or 'Transmission of Shares':
The core issue was whether the transfer under the amalgamation scheme constituted a 'transfer of shares' or a 'transmission of shares'. The Articles of Association distinguish between voluntary transfers (subject to pre-emption rights) and transmissions (not subject to pre-emption rights). The judgment emphasized that an amalgamation scheme transfers the entire undertaking as a going concern, not individual assets or shares. Therefore, such transfers do not fall under the voluntary transfer provisions (Articles 21 to 38) but rather under the 'transmission clause' of Article 39, which covers entitlements to shares arising by lawful means other than by transfer in accordance with the Articles.

4. Reliefs and Directions Provided by the Company Law Board (CLB):
The CLB's decision to classify the transfer under the transmission clause was upheld. However, the judgment modified the relief granted by the CLB. The Appellant company was given the option to either register the first Respondent as a shareholder or allow the first Respondent to sell the shares in accordance with the Articles of Association. Alternatively, the Appellant could buy the shares through a purchasing member at a fair value determined by the company's auditors as per Article 25. This option had to be exercised within 28 days. Until then, the status quo regarding the company's fixed assets was to be maintained as per the interim order dated December 23, 2014.

Conclusion:
The judgment affirmed the CLB's classification of the transfer under the transmission clause but modified the relief to provide the Appellant company with options regarding the registration or sale of shares. This ensures compliance with the Articles of Association while recognizing the unique nature of amalgamation schemes.