2020 (7) TMI 560 - Tri - Companies Law

Rectification of the register of members of the respondent-company - Restraint on respondent-company from holding the annual general meeting or extra-ordinary general meeting - section 59(1) of the Companies Act, 2013 - HELD THAT - The respondent-company in the instant application will fall under the category of unpaid seller who can exercise the above rights only. Nothing more - It is settled law as decided by the hon'ble Supreme Court of India in its judgment in TRIVENI SHANKAR SAXENA VERSUS STATE OF U.P. AND OTHERS 1991 (12) TMI 285 - SUPREME COURT that a lien is only a right to retain which is rightfully and continuously in possession belonging to another until the claims are satisfied. It can be acquired either by contract or by operation of law. It is the right of retention of goods. In the absence of delineated process to exercise paramount lien, the respondent-company can exercise lien to the extent of retention of goods ; in this case shares which can be extendable payable to the shareholder - In the instant application, the respondent auctioned the shares without the consent of shareholders and without the original share certificate and transfer form in their possession. The earlier action appears to be illegal and not as per the Companies Act, 2013. As such the answer to the third point is also negative The company has no right to auction and allot the shares to third parties ignoring the right of fully paid-up shareholders. The rental dues claimed by the respondent-company are not supported by a rental/ lease agreement which is agreed by the shareholder - the applicants are declared as the legitimate equity shareholders under Folio No. 50. It is hereby directed that the rectification of the register of members of the respondent-company by re-entering the total number of 100 equity shares belonging to the late husband of the first applicant and late father of the second applicant and third applicant in the share register of the company and further ordering to restore the total shareholding of the applicants as it existed prior to February 8, 2019 forthwith.

Summary

Issues Involved:
1. Paramount lien and sale of shares for recovering dues.
2. Contractual agreement for recovery of rental dues by auctioning shares.
3. Due process in auctioning and allotting shares to a third party.

Detailed Analysis:

Issue 1: Paramount Lien and Sale of Shares for Recovering Dues
The tribunal examined whether the company could sell a shareholder's shares to recover dues by exercising paramount lien. The articles of association of the respondent-company and Table F of the Companies Act, 2013 were scrutinized. Clause 6(1) of the articles of association stated that regulation 9 of Table A (1956 Act) does not apply, implying that clause 9 of Table F is also inapplicable. Clause 6(2)(b) allowed the company to exercise paramount lien for dues recovery, extendable to dividends payable. However, the articles did not prescribe a process for such recovery. The tribunal rejected the respondents' argument that clauses 10, 11, and 12 of Table F applied, as they flow from the inapplicable clause 9.

The tribunal referred to the Sale of Goods Act, 1930, defining shares as "goods" and examined the rights of an "unpaid seller." It concluded that the company could only retain shares (lien) and not sell them without the shareholder's consent. The tribunal cited the Supreme Court's judgment in Triveni Shankar Saxena v. State of Uttar Pradesh, emphasizing that a lien is a right to retain possession until claims are satisfied, not a right to sell.

Issue 2: Contractual Agreement for Recovery of Rental Dues by Auctioning Shares
The tribunal found no agreement indicating that the shops occupied by the applicants were leased by the respondent-company. The company collected service charges, not rent, due to the absence of a lease agreement. The tribunal noted that unilateral actions by one party without a written agreement or documentary evidence are invalid. The respondents' arguments regarding benami holdings and Income-tax Act violations were unsupported by credible evidence or notices from authorities. The company had not taken steps to regularize the shops' status or evict occupants for rental arrears.

Issue 3: Due Process in Auctioning and Allotting Shares to a Third Party
The tribunal found the articles of association silent on the process for exercising paramount lien. The company auctioned shares to recover rental dues without the shareholder's consent, original share certificate, or transfer form. The tribunal referenced the Delhi High Court's judgment in Jagatjit Distilling and Allied Industries Ltd v. Bharath Nidhi Ltd., distinguishing between lien and pledge. A lien allows retention, not sale, whereas a pledge includes the right to sell on default. The tribunal concluded that the company's actions were illegal and not in accordance with the Companies Act, 2013.

Conclusion and Orders:
The tribunal ruled in favor of the applicants, declaring them legitimate equity shareholders and directing the rectification of the company's register of members to restore the applicants' shareholding. The company was restrained from conducting tenders for the sale of the applicants' shares without their consent. The tribunal ordered the company to file the rectified register with the Registrar of Companies within a month and to pay ?25,000 to the petitioners for costs and damages.