9911796707
TMI Blog1978 (12) TMI 136X X X X Extracts X X X X X X X X Extracts X X X X ..... Companies Act, 1956. The appellant-company was directed to pay the costs of the petition to the respondents herein. Thereafter, the present appeal was filed, and pending the appeal, the operation of the order of the learned judge regarding rectification of the register of shareholders was not required to be stayed because Mr. Hava for the respondents stated that his clients would not press for implementation of rectification of the register of shareholders. Facts giving rise to this litigation are that respondent No. 1 herein is a shareholder of the appellant-company, Master Silk Mills Private Ltd., hereinafter referred to as the "Master Mills". Respondent No. 1 was the registered holder of 260 equity shares, 136 first preference shares and 36 second preference shares of the Master Mills. On February 15, 1976, the first respondent entered into an agreement with respondent No. 2 herein, New Mahalaxmi Silk Mills Private Ltd., hereinafter referred to as "New Mahalaxmi Mills". The first respondent is the chairman of the New Mahalaxmi Mills. The agreement was to transfer all the shares of Master Mills held by the first respondent. On 10th March, 1976, the first respondent wrote three ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany would testify to be the fair market price as between a willing seller and a willing purchaser or at a price which could be agreed upon between the vendor and the Board. Respondent No. 1 further stated that he had a willing purchaser for his shares at the price stated in the transfer notice, dated 10th March, 1976. He, therefore, requested the auditors to take note of that fact while fixing the fair value of his shares. On July 9, 1976, the managing director of Master Mills sent a circular letter to all shareholders of the company in which he stated that a shareholder of that company had offered 260 equity shares, 136 first preference shares and 36 second preference shares for sale at the fair value of these shares as fixed by the auditor, which were also mentioned in that circular letter. With these details, the managing director invited the existing shareholders to purchase the shares offered by respondent No. 1 if any one of them was interested in those shares. On August 7, 1976, the managing director of Master Mills wrote to respondent No. 1 that the company had circulated his offer for sale of shares to the existing shareholders and that no offer was received from any exis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned brother, but out of those several contentions, ultimately at the stage of appeal, Mr. Nanavati on behalf of the appellant, Master Mills, has confined his argument only to two main contentions. His contention is that under article 76 of the articles of association of Master Mills, any transfer by a member to an outsider is subject to the approval of the board of directors and since the board of directors did not approve of the transferee, namely, New Mahalaxmi Mills, rectification of the register could not be granted. He urged in this connection that, unlike a public limited company, a private limited company is more in the nature of a partnership concern where there should be mutual confidence amongst the shareholders and, in the instant case, New Mahalaxmi Mills was a rival company engaged in more or less similar line of business as that of the petitioner-company and, therefore, the board of directors had justifiable reasons in refusing to register the transfer of shares from respondent No. 1 to New Mahalaxmi Mills. In this connection, Mr. Nanavati for the appellant urged that a private company is in the nature of a partnership of persons with mutual confidence in each other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing activities is not on the same lines. Master Mills purchase art silk yarn and manufactures art silk cloth. This constitutes more than ninety per cent, of its business. It also carries on, to an insignificant extent, business of production of art silk cloth. So far as New Mahalaxmi Mills is concerned, the manufacture of art silk cloth consists of eight per cent, of its business while ninety-two per cent, of its business consists of processing art silk cloth. It is thus clear that what constitutes the major part of the business of one company constitutes an insignificantly small part of the business of the other company. Moreover, Mr. Bhabha pointed out from the affidavits in the case that whereas Master Mills is carrying on its activities at Bhavnagar, New Mahalaxmi Mills carries on its activities in Bombay. Secondly, even as regards weaving of art silk cloth or manufacture of art silk cloth by New Mahalaxmi Mills, it is more like a job work where yarn supplied by customers is woven by New Mahalaxmi Mills and cloth thus prepared is given back to the customers at appropriate adjustment of rates. Thus, the principal activity of New Mahalaxmi Mills is that of processing cloth or pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Thakar, of Master Mills. In our opinion, the finding of fact that there was no rivalry, between Master Mills and New Mahalaxmi Mills cannot be disturbed, but Mr. Nanavati is right when he contends that it is not a finding of fact given by a court of law that would matter but what would matter is the opinion of the board of directors of Master Mills regarding the possibility of rivalry between the two concerns. In our opinion, the real crux of the matter is as to what transpired at the meeting of the board of directors held on December 23, 1976. English translation of the extract from the minutes of the meeting held on December 23, 1976, is Annex. I to the affidavit of B.K. Thakar, principal officer of Master Mills, and according to that extract of the minutes, the managing director of Master Mills informed the board of directors that if these shares were transferred to New Mahalaxmi Mills, the same company would have a holding of 14 per cent of share capital in Master Mills. At present, under the provisions of section 43A of the Companies Act, if a body corporate held 25 per cent, of shares of a private company, the said company is to be deemed to be a public company, but if ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of directors thought it desirable, in the interest of the respondent-company, that no corporate body should be permitted to become a member of the respondent-company and only with that consideration, petitioner No. 2 was not approved by the proposed transferee to become a member of the respondent-company." It is thus clear that the only consideration which weighed with the board of directors of Master Mills in not approving New Mahalaxmi Mills was the consideration that a corporate body should not be permitted to become a member of Master Mills. That and that was the only factor which weighed with the board of directors in rejecting the application for registration of transfer. The question will have now to be examined whether this was a relevant and germane factor for the consideration of the directors while considering the question of approval of the transfer. Articles 71 to 76 of the articles of association of Master Mills are relevant for this purpose. Article 71 deals with transfer of shares by a member to any other member and is not, strictly speaking, relevant for our purposes. Article 72 deals with transfer of shares by one member to his wife and other relations and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not bona fide, but that the transferee is the mere nominee of the transferor, and the transfer is made to increase the number of shareholders who will support him in a policy which the directors disapprove." Lord Cozens-Hardy M.R. observed at page 133 of the report : "In the case of Ex parte Penney [1872] LR 8 Ch App 446 that great judge, Mellish L.J., says : 'The directors have no right to say, "We will force a particular shareholder to continue a shareholder, and we will not allow him to transfer his shares at all." That would be an abuse of their power. In the same way it would be an abuse of this power to object, on any ground not applying personally to the transferee, to say, for instance, that a particular shareholder should not transfer his shares till he had given security for the calls.' That lays down a principle which seems to me to be perfectly sound and a principle which has been followed, so far as I am aware, for at least forty years, and I should be very sorry in any way to infringe upon it. The point which is taken by Mallish L.J. is this : You may look and see personally who the transferee is. There may be personal objections to him ; it may be because he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany consisted of 8,002 ordinary shares, of which the two directors of the company, J.F. and N.S. held 4,001 each. J.F. died, and his son as his executor applied to have the testator's shares registered in his name. N.S. refused to consent to the registration, but offered to register 2,001 shares and to buy 2,000 at a fixed price. The executor applied to the court by way of motion that the register of members of the company might be rectified by inserting his name as the holder of the 4,001 shares. The Court of Appeal held that article 10 gave the directors the widest powers to refuse to register a transfer, and that, while such powers were not of a fiduciary nature and must be exercised in the interests of the company, there was nothing to show that they had been otherwise exercised. In connection with the decision in In re Bede Steam Shipping Co. Ltd. [1917] 1 Ch 123 (CA), Lord Greene M.R. observed at page 307 (of [1942] Ch): "It is perfectly clear from that observation that the court was not laying down a general rule to be applied to all forms of article, but was coming to a decision on the particular article before it, the future of which was such as to confine the direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f not less than 25 per cent, of the paid-up share capital is held by one or more bodies corporate. If that is the position, a private limited company shall, on the very day on which the aforesaid percentage is held by bodies corporate, become, by virtue of the section, a public company. It is true that at one stage there was a proposal that this percentage of 25 should be reduced to 10. The report of the Companies Act Amendment Committee proposed that the percentage should be reduced from 25 to 10. However, the Joint Committee of Parliament ruled otherwise and it observed : "The Committee also consider it unnecessary to require a private company which has become a public company to pass a resolution for the change of its name." The view of the Committee was that "reduction of the percentage of shareholding from twenty-five to ten is likely to hamper the formation and growth of private limited companies in the small scale sector, especially in the rural areas and, therefore, the provisions of section 43A(1) should not be disturbed" (vide Ramaiya's Guide to the Companies Act, 8th Edn. p. 128). Whatever the position might have been prior to 1974, at least in December, 1976, when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other has observed "The second reason which has been advanced on behalf of the respondent-company (Master Mills) is that it is the policy of the respondent-company not to admit any other private limited company to its membership." He has further observed : "Reference to the policy decision and reference to past decision are not borne out by any evidence. Mr. K.S. Nanavati has, therefore, very rightly told me that he did not press these two grounds in support of the impugned decision or resolution, However, though he did not press it in support of the impugned resolution, it cannot be gainsaid that the impugned resolution was passed under circumstances which indicated one and only one state of affairs, namely, non-application of mind." Then, our learned brother Sheth J. also came to the conclusion that the impugned resolution was passed by the directors in circumstances which indicated only one state of affairs that prevailed with the directors, namely, that it was a policy of the respondent-company not to admit any other private limited company or other body to its membership. Now, this sort of blanket decision does not mean that there was non-approval of the particular individua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subordinates of McRobert, the managing director of Cawnpore Mills, There was personal animosity between Hohnson, the managing director of the Muir Mills and McRobert. The directors of the Muir Mills came to a conclusion that McRobert should not add to his voting power and "harass the management". This was found to be an abuse of the fiduciary discretionary power of the directors when they wanted to safeguard the director's personal interest against McRobert. It is true that the case of Bajaj Auto Ltd. v. N.K. Firodia, [1971] 41 Comp. Cas. 1 (SC) was a case of a public company whereas the company before us is a private limited company, but the general principles under section 155 are the same and section 155 itself makes no distinction between a public company and a private company. All that we have to bear in mind is that when we are considering exercise of discretion by the directors of a private company, some more leeway should be given to them in view of the fact that a private limited company is a corporate firm or a partnership or more or less of that natnre. So far as private limited companies are concerned, Palmer has pointed out in para 40-12 at p. 393 in Palmer's Co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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